Budget 2017: Parliamentary Budget Office & Financial and Fiscal Commission briefing

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Finance Standing Committee

28 February 2017
Chairperson: Ms Y Phosa (ANC) and Mr Y Carrim (ANC)
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Meeting Summary

A joint sitting of the Standing Committee of Appropriations, Select Committee on Appropriations, Standing Committee on Finance and Select Committee on Finance met to receive briefings from the Parliamentary Budget Office (PBO) and the Financial and Fiscal Commission (FFC) on the 2017 budget.

The Budget Office said the 2017 budget still calls for fiscal consolidation, and the budget definitely gives effect to the transformation agenda. There is a shortfall in revenue collection, and it also depends on economic growth. Tax expenditure revue is an option to increase the revenue baseline. Under expenditure in 2016/17 is expected to exceed R6 billion, and the wage bill really needs to be interrogated, especially in terms of the figures concerning the headcounts. Treasury has outlined the following fiscal risks and the measures they are taking to solve them. In terms of the wage bill, they will reduce appointments in non-critical positions to stabilise headcounts. In terms of the inefficiencies of expenditure, they want to improve budget execution, improve in year monitoring, and reform the procurement system. Parliament also has a big role to play in an oversight role. In terms of the division of nationally raised revenue; local government increased from 8.9% to 9.1%, provincial increased from 33.1% to 43.4%, and National Departments decreased from 48% to 47.6%.

The 2017 budget is seen as one where government has looked everywhere for new revenue collection mechanisms. The point is to encourage in-depth discussions around tax expenses, and come up with targeted policy considerations to do with reviewing tax expenses.The vat proposals involve trying to expand the vat base, for example by removing the zero-rating on fuel. It was intended to subsidise business but taking this away will provide much needed vat revenues. Luxury items tax could also be a more progressive tool that would widen the base.

The PBO, discussed expenditure proposals for transformation. There will be redistribution to low and middle income households: first, the no student fee increases for lower income families, and second, the threshold for transfer duties being increased. Redistribution and transformation will also be achieved through an increase in social grants to the most vulnerable, such as: old age grants, disability and care dependency grants (each of which increased by R90 per month), foster care grants (increase of R30p.m.), and child support grants (increase of R20p.m.). There are also 3 new conditional grants (for ECD, social workers, and disabled learners), a general increase in the amount of revenue supporting the current grants, and there will be a general reprioritisation.

Several members raised issues regarding the PBO support for increased government borrowing. Others stated that government is borrowing too much. Members were also disgruntled that the circulated documents were different to the one presented. Rather than focus on revenue that could be generated from tax, members encouraged the PBO to consider what is being lost to over and under spending in particular sectors. In addition, several members raised concerns over corruption, pointing out that parliamentary oversight must be increased so as to block inappropriate expenditures on salaries in particular. Several members also questioned the independence of the PBO; Mr Shaik Emam (NFP) challenged the PBO to give their own opinion on borrowing and debt, rather than repeat what government has already said.

The Commission said since 2008/2009 it is the first that there has been a primary surplus that can cover all non-interest expenditures. In addition, there has been little need for downward revenue forecasts due to growth being similar to its forecast. However, debt is not considered to be at an optimal level. The FFC is concerned about whether or not debt growth is sustainable – as it relates to budget deficit vis-à-vis the growth rate. If this ratio is stable, then debt is under control. The 2019/2020 projections expect a convergence of the deficit and the growth rate. So there is no need for excessive fears that debt is not stable. Threats to the economy and negative growth rates seem unlikely in the forecast period.

There is nothing in this year’s budget that removes the provision of social services and alleviation of poverty. There is no reason to believe the government is reducing pro-poor elements of the budget. Furthermore, the FFC does agree that fiscal measures alone are not enough to create growth. Other tools are necessary to reignite growth upwards to figures like 5.4% by 2020.

The Commission fully supported government’s position on ‘gradual’ fiscal consolidation and tabling Fiscal Frameworks with a positive primary balance and tightening measures to maintain expenditure sustainability. It was supportive of the moderate rise in public debt and debt servicing costs while limiting negative impact on future growth and protects much needed social services. It argued that the rise in PIT should not become a trend – it should only be seen as a necessary short term measure. More needs to be done to reignite higher economic growth consistent with NDP and also requires structural reforms that include: measures to raise total savings, structural and economic reforms in product, service and labour markets, reinvigorating agriculture and rural development, 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.  Labour absorption in manufacturing is also a problem – and it is lower than other countries. The same is true in rural development. But manufacturing alone can not cover the unemployment rate; rather rural development and agricultural interventions are crucial.

Several members raised concerns with regards to the FFCs position in relation to an increase in VAT and argued that the Commission would not consider an increase in VAT if they had first-hand experiences of those living in poverty. The FFC chided Members for not reading their previous documents and not asking the right questions.

Because of time constraints, members were requested to hold their questions, and rather submit them in writing to the Secretary and both entities would reply to this.

Meeting report

Briefing by Parliamentary Budget Office (PBO)

Pro Seeraj Mohamed, Deputy Director, PBO, said that the PBO supports Parliament in its oversight role by providing advice and analysis on Money Bills and related matters. This presentation would analyse the revised Medium Term Expenditure Framework (MTEF), considering its responsiveness to address the country’s social and economic challenges within the current fiscal environment.

The role of the budget is to promote distribution, direct scarce resources towards catalytic investments in human and physical capital. The budget depends on the economy to generate the resources to finance these investments. South Africa had several years of very low growth, such that the 2017 Budget calls for fiscal consolidation.

The view of modern mainstream economics is that government spending and debt influences inflation and aggregate demand. What if government borrows more to support much needed transformative household consumption and investment? One example: government borrows R1.00 to support a R1.00 increase in household consumption or infrastructure investment, and the average multiplier for sectors that would benefit from this spending is 1.6, therefore the increase to GDP of that R1.00 consumption should be R1.60. In addition, the contribution to the growth rate of the borrowing is greater than the interest rate, thus fiscal consolidation may not be the only way forward as borrowing can be stimulatory.

He continued by outlining strategic direction of the budget, which aims to give effect to the transformation action agenda by financing government programmes to ensure that many more people live in dignity every year, radically improve access to services and economic participation across racial lines, energise growth and create jobs, and increase investment and development in all spheres of government.

Currently, the contingency reserve is R26 billion, while R220.9 billion in the gross borrowing requirement for 2017/18. There is an increase of R28 billion in revenue raised through the addition personal income tax (PIT) bracket, limited PIT bracket relief, increase fuel levy, increase dividend withholding tax.

He expressed confidence about the National Treasury forecasts, claiming them to be more accurate than the IMF, World Bank and Bureau for Economic Research (BER). The graphs represented higher-growth and lower-growth scenarios, as well as the NT forecast. Lower growth may require additional consolidation measures (revenue and expenditure) to realise current fiscal policy objectives, which would yield adverse effects on service delivery, investment and realisation of social objectives. While higher growth would mean additional fiscal consolidation measures may not be necessary.

Dr Dumisani Jantjies, Deputy Director: Finance, PBO, said it is the first time since 2009/2010 that tax revenues are expected to grow slower than the economy. In 2016/17 gross tax revenue budget was R1.175 trillion, while the revised revenue shortfall is estimated at R30.4 billion. Nonetheless, he believes that there may be room for improved tax collection efficiency.

Change in taxes affects growth, consumption, income distribution and progressivity of the tax system, thus the least-harmful suite of revenue changes is required. Low economic growth, high unemployment, high food prices and poor corporate profitability must be considered when discussing changes to tax systems. An increase in PIT will dampen consumption and growth, but the new PIT brackets and the increase on dividend withholding tax furthers the progressive nature of the PIT system. Limited relief for PIT bracket creep will see an increase of R12.1 billion of revenue, while an increase on dividend withholding tax (15% → 20%) will yield an increase of R6.8 billion. He also specifically pointed to the increase in the general fuel levy which will bring about an increase of R3.2 billion, but would have an adverse effect on poorer households. He also mentions carbon and sugar tax, saying both have been proposed but are not yet implemented.

There is a 50% chance of the actual tax revenue collected for 2017/18, falling somewhere between a 13.5bn shortfall and a R13.5bn surplus. He makes a correction to the presentation: R1.1 trillion is not correct forecast; rather the true forecast is R1.26 trillion. We must consider a risk-mitigation measures in the case government does not meet the target.

The 2017 budget is seen as one where government has looked everywhere for new revenue collection mechanisms. The point is to encourage in-depth discussions around tax expenses, and come up with targeted policy considerations to do with reviewing tax expenses.

The vat proposals involve trying to expand the vat base, for example by removing the zero-rating on fuel. It was intended to subsidise business but taking this away will provide much needed vat revenues. Luxury items tax could also be a more progressive tool that would widen the base.

Ms Nelia Orlandi, Deputy Director: Public Policy, PBO, discussed expenditure proposals for transformation. She stated there will be redistribution to low and middle income households and cites two instances for evidence of this: first, the no student fee increases for lower income families, and second, the threshold for transfer duties being increased. Redistribution and transformation will also be achieved through an increase in social grants to the most vulnerable, such as: old age grants, disability and care dependency grants (each of which increased by R90 per month), foster care grants (increase of R30p.m.), and child support grants (increase of R20p.m.). There are also 3 new conditional grants (for ECD, social workers, and disabled learners), a general increase in the amount of revenue supporting the current grants, and there will be a general reprioritisation.

She took Members through the functional changes since the 2016 MTBPS. For the current financial year, health is estimated to over-expend by R1.6 billion. Economic affairs is estimated to under-expend by R6 billion. Human settlements and municipal infrastructure will under-expend by R1.3 billion. General public service will over expend by R2.1 billion. Total under expenditure for this financial year is R6 billion. The reason for under spending is that in some cases the money will be budgeted to be used in the outer year, or kept for longer term projects. Compensation to employees will under spend by R2.7 billion, goods and services will over spend by R3.7 billion, but the main under expenditure is the R8.1 billion on payments of capital assets.

Ms Orlani said that compensation of employees on average is growing by 7.2%, but there is a big variation in average unit cost between the different departments – but she was not sure that this information was credible. The biggest department is Internation Relations and Cooperation and they are going to reduce their head counts by 6% in the medium term. The Department of Planning, Monitoring, and Evaluation will increase its headcounts by 12.1% and Public Works will increase theirs by 12%.

Treasury has outlined the following fiscal risks and the measures they are taking to solve them. In terms of the wage bill, they will reduce appointments in non-critical positions to stabilise headcounts. In terms of the inefficiencies of expenditure, they want to improve budget execution, improve in year monitoring, and reform the procurement system. Parliament also has a big role to play in an oversight role. In terms of the division of nationally raised revenue; local government increased from 8.9% to 9.1%, provincial increased from 33.1% to 43.4%, and National Departments decreased from 48% to 47.6%.

In summary, the 2017 budget still calls for fiscal consolidation, and the budget definitely gives effect to the transformation agenda. There is a shortfall in revenue collection, and it also depends on economic growth. Tax expenditure revue is an option to increase the revenue baseline. Under expenditure in 2016/17 is expected to exceed R6 billion, and the wage bill really needs to be interrogated, especially in terms of the figures we have received of the headcounts.

Discussion

Ms Phosa said that they can arrange for the last slide of the presentation to be sent to members later in the day. She then opened the floor to members to ask questions.

Mr A McLaughlin (DA) raised a general concern that the meeting is not long enough for the joint committees to properly deal with the presentation. The members only received the presentations yesterday, and it is not possible to engage with it properly in this amount if time. He proposes that the structure of these meetings needs to be changed.

Mr Carrim agreed. The Money Bills Act is being reviewed and is a top priority. Deadlines have to been increased to deal with time issues. Even if we change deadlines, we will never fully exhaust all questions. So another method is an “interactive mode”. Replying in writing is one way to save time. The system does need to be overhauled, however there is no excuse for delegates to supply presentations so late.

Mr McLaughlin referred to the slides (‘Background cont.’ slide). He wanted to know where the multiplier of 1.6 come from - who decides on this figure?  In the last bullet (“The contribution to the growth rate is greater than the interest rate”) – does this interest rate refer to the rate faced by government on the loan?

He then referred to the ‘Strategic direction’ slide, particularly the point about ensuring the dignity of poorer South Africans.  He did not believe that is going to happen with this budget. The fuel price is regressive – food costs will go up. All goods will go up in price especially as everything is transported by road not trains due to poor rail delivery. Lives will get worse due to this, not better, so how could the PBO say this?

In addition, he believed that the wage bill reduction through reducing headcount is contradictory in terms of increasing service delivery. It is productivity that matters. With regards to increased investment, he asked what incentive there is for people to invest in a system making losses? Furthermore, did the PBO factor inflation into the increase of 2.5%?

Further, Mr McLaughlin wanted to know where is the extra R30b from contingency reserve coming from and why there is a discrepancy in the figure for gross borrowing?

Ms Phosa ruled that each Member could only ask 3-5 questions per round. She would allow Mr McLaughlin to have one more.

Mr Carrim suggested Mr McLaughlin submit his questions in writing to the secretary in the meeting.

Mr Figg (DA) said it is not only about number of questions but time.

Ms Phosa urged Members to be succinct in their questions.

Mr McLaughlin raised a point on fiscal goals. He explained that there has been a slow pace of debt accumulation. In 2012 the deficit was 4.6 and the government aimed to reduce it to 3.6 to stabilize debt at 38%. In 2014, debt reached 25%. Today, debt is 50.7% to GDP – the country was borrowing far more than what was first said. Additionally, the projections and intentions are consistently different and more positive than what is realized. In his view, we are involved in a “runaway situation”.

Mr Maynier (DA) stated that the hardcopy document is different to what appeared in the presentation given by the PBO. He requested that they circulate correct documents. He was sceptical about the presentation suggestions that we can reject mainstream economics and just borrow more. The PBO is supposed to be independent. He called on the PBO to rationalize a sound opinion on economics and debt – to give their independent position.

Mr A Lees (DA) asked if the PBO considered the only problem is not just low growth by the collection administration, that is very apparent, but also due to a technology deficit and skills deficit at SARS.  He claimed that there is an over-reliance on interns due to skills lost, and this must be factored in.

Ms N Mokgosi (EFF) said she can not support borrowing. She then spoke of dignity, specifically that the budget does not speak to women’s rights and issues relating to women. She asserted that grants are only a short term solution, and structural issues must be addressed as they persist in the long run. We must empower women, and create jobs for women; the budget does not consider this. In her view, parliamentary oversight is not doing enough to take care of troubled public entities. She referred to the CEO of PRASA, who had increased his salary by 350%. This is unjustifiable. Parliament must strengthen its oversight. Government can not borrow money only to pay for these salaries; rather, we need money to reach the poor. She concluded by calling South Africa a “pathetic and dependent” state that is reliant on borrowing.

Mr M Figg (DA) claimed that using a bell curve as a statistical method is misleading and will create uncertainty. With regards to the payments of capital assets, the R25 billion that is under spent is highlight problematic. He called on the PBO to give an answer to what should be done. In addition, the debt-service costs are spiralling out of control. The projection made by the PBO is based on the country's current credit-rating, but he asked the PBO to consider the effects that could occur if the credit-rating is downgraded.

Mr Maynier referred to the statement made by the PBO that tax revenues are expected to grow slower than the economy. He wanted to know why? What is the problem with our tax collection? We need to stimulate the economy and not just create debt, or we will have an unmanageable deficit.

Ms D Senokoanyane (ANC) expressed concern about under spending on capital asset payments. She also asked for a more detailed explanation of the headcounts slide.  In particular, what is driving the high figures? She also noted the document circulated is different to the presentation given; for example: slide 12 and 13 differed to the presentation.

Mr B Topham (DA) asked the PBO to talk more about borrowing the 1.6 multiplier. He noted we are at 9 times the borrowing level before; where is the growth that this assumption predicted? Has the PBO done a study on the dividend tax? The increase is dramatic – 30% higher. In addition, the majority of pensions are not exempted and many pensions rely on dividends. The PBO must conduct a study on the impact this will have. Furthermore, he argued that we have to change all the forms which is administratively costly.

Mr A Shaik-Emam (NFP) repeated the earlier point on the debt isue and said he is really concerned about it. He believed the country is heading for a fiscal cliff. He then questioned the views of the PBO, saying that what was heard from PBO is related to what government has already decided. The PBOs view should rather differ from what is already being done. He also argued that there are other aspects in the economy that could raise revenue and save cash, but the PBO or other members do not speak about it. Over 40% of what is spent is based on over-spending.  “These figures are astronomical”. He claimed that the PBO and other Members must give their attention to these excessive expenditures instead of talking about the usual tools such as VAT.  With regards to irregular expenditure and cost-containment, Members must give these things attention too. He argued that reducing the deficit in this way will reduce borrowing. He agreed strongly with the idea that it is the correct thing to borrow, but asserted that it must be done differently. He then asked the PBO to offer a view that differed with what government has already decided.

Ms C Madlopha (ANC) also highlighted the increasing debt. She said that government wants to borrow to fund increased investment, but there is a massive under expenditure. She claimed that it makes no sense to incur debt on money we are not spending. She requested the PBO to explain what government and committees can do about under-spending. She felt powerless to address this as there are no consequences in place for under-spending. Next, she asked how money much is being lost to corruption. Parliament must strengthen its oversight function. Lastly, with regards to unemployment and vacancies in government: she asked why is this happening and how can it be dealt with? She claimed that they fail to be exemplary in this regard. She also explained that she doesn’t like the term “radically improve access to services”, used by the PBO – she wanted to know how is this going to happen? Development and improved access must be done in a way that is truly inclusive and not just in service to white or black elites.

Mr N Gcwabaza (ANC) did not think it was fair for members to ask PBO to respond on behalf of work that should be being done by Parliament itself. The PBO needs to be objective when analysing the budget, and he did not feel it is fair for Members to question their independence. He claimed that Parliament must respond to issues in the budget - the PBO is not solely responsible to the budget. He called on slide 5 in the PBO presentation; it suggests that the effect of government on infrastructure or household consumption boils down to the exact same 1.6 return. He asked if it really works like this in monetary terms? He also requested the PBO explain what are the current weaknesses in the tax collection system.

Prof Mohamed thanked Mr Gcwabaza for pointing out that some of the questions from Members are not necessarily the responsibility of the PBO. He explained that strategic direction is taken directly from the National Budget review, and not generated by the PBO. The fiscal framework is also simply providing information from the budget review in a succinct format.

Address Mr Maynier, he explained that the point of the slide is that the mainstream has changed, and the PBO is not necessarily going against the mainstream. Experiences show that the job of a central bank was to respond to inflation and that there was no role for fiscal policy to stimulate growth. This view still somewhat shapes the rhetoric. The point is just that the approach is changing towards appreciating fiscal policy as a tool to pursue short to long term goals. With regards to debt levels and sustainability; debt is usually measured as a share to GDP. Sustainability therefore depends on the level of GDP as well as debt.

He too responded to the issue of the multiplier of 1.6, stating that it is from the national  budget review, and several are given for different economic sectors. He referenced an Italian economist called Pasinetti, who showed that economies can run deficits and high debt ratios if the interest grows at a rate lower than the growth rate of the economy. His point was that a high-debt strategy is possible, and that aggressive counter-cyclical fiscal policy can go along with it.  A country can take on debt to spend itself out of the downward part of the cycle. However, he conceded that this theory is still up for debate. He concluded by stating that the PBO proposal is not a major diversion from the past.

Mr Jantjies explained that there are matters within governments control and those outside. He claimed that growth is outside of the government’s control. However, inefficiencies in tax collection can be dealt with. In response to Mr Topham, he agreed that the PBO must conduct a study and analyse the findings. Additionally, he stated that 2016 was a bad year for under-spending. All economic clusters (health, finance, social, justice) had underspent. Irregular expenditure must also be taken into account, but the responsibility lies with Parliament to come up with a plan to remedy these problems.

Ms Orlandi clarified the figures she presented on expenditure. The medium-term numbers have been updated since the MTBPS. Economic affairs is now under spending by R6 billion, so their budget was reduced. This, she believed, would explain the discrepancy in the budget. Inefficiencies are present but are extremely difficult to find. There are compensation increases that are individually outside of the National Treasury guidelines, and there are issues with headcounts that have not been fixed in the main budget. But unspent funds should have been more fully reallocated. She called on Members to interrogate the adjusted budget and realize that there is compensation money that has been reallocated, and these changes must be approved by Parliament. She referred to President Zuma’s SONA address, where he   indicated that processes and systems need to be changed. She again urged Members of Parliament to consider how  these inefficiencies can be addresses.

Mr Brandon Ellse, Public Finance Analyst, PBO, explained the forecasting chart. There is a forecast of National Treasury’s historic errors incorporated into it, which is averaged over time and then applied to the estimate based on a bell curve. An interval with probabilities is natural in the space of uncertainty and risk, and this is an international norm. In response to Mr McLaughlin, he explained that is an expected outcome given that GDP growth is so low. Tax buoyancy is a responsiveness of tax to growth – and it becomes closer to 1 when growth is low. It is so low now that the figure for tax buoyancy is below 1. The PBO has not done any specific analysis in relation to withholding dividend tax.

Mr Rashaad Amra, Economic Analyst. PBO, agreed that the Money Bills Act has put pressure on the time-span and that it has negatively affected the work quality. Government can handle the problems associated with the headcount, but not the settlement level which was a large problem two years ago. Addressing Mr McLaughlin, he explained that the contingency reserve has growth figures available in the presentation. He then went on to explain that debt to GDP ratio is not a target. There are expenditure ceilings in place and these have never been reached. Debt to GDP is converted from a stock and this is then affected by the state, and growth rate of the level of debt has actually declined over the 2015-2020 period.

The PBO could not answer any more questions because of time.

Ms Phosa called on National Treasury to respond.

Mr Michael Sachs, DDG: Budget Office, National Treasury, referred to an article that appeared in that week’s Economist. It was an editorial about gender-budgeting. It said that when you introduce tax measures, you must consider what impact it would have on men versus women. Medical tax credit is the example the article used to show that there is a gender component, as many tax systems accommodate family employment. They assume a structure of the family contrary to what is the reality for many South African families.

Analysing the budget through the prism of gender is, therefore, critical.

Mr Carrim interrupted, and said we must prioritise the FFC and get to their presentation.

Mr Sachs continued: in the cover of the budget review, there was a page about how to understand the budget. It makes the distinction between the consolidated and main budget. The main budget is appropriated by Parliament, whereas the consolidated budget includes elements of the budget that Parliament has no oversight, such as provincial budgets and public entities. When one sees a change in the consolidated budget, between MTPBS and now, it does not necessarily mean that something has happened – it may just be a revision of figures. For example, the spending performance in water-boards was revised significantly, and the health budget was revised after the provincial centres were visited and greater spending was deemed necessary. With regards to unit costs of headcounts, this will change depending on if you hire more senior as opposed to more junior people. If you reduce junior members you get a higher average cost amongst those left.

Mr Maynier wanted to ask another question, but was overruled due to time constraints.

Briefing by Financial and Fiscal Commission (FFC)

Dr Ramos Mabugu, RRP Director, FFC, said since 2008/2009 it is the first that there has been a primary surplus that can cover all non-interest expenditures. In addition, there has been little need for downward revenue forecasts due to growth being similar to its forecast.

However, debt is not considered to be at an optimal level. The FFC is concerned about whether or not debt growth is sustainable – as it relates to budget deficit vis-à-vis the growth rate. If this ratio is stable, then debt is under control. The 2019/2020 projections expect a convergence of the deficit and the growth rate. So there is no need for excessive fears that debt is not stable. Threats to the economy and negative growth rates seem unlikely in the forecast period.

There is nothing in this year’s budget that removes the provision of social services and alleviation of poverty. There is no reason to believe the government is reducing pro-poor elements of the budget. Furthermore, the FFC does agree that fiscal measures alone are not enough to create growth. Other tools are necessary to reignite growth upwards to figures like 5.4% by 2020.

With regards to tax proposals, options are ranked according to their potential effect. Most preferred in the list are property taxes, as these are immobile. Second is VAT, while most disproportional is corporate income taxes. Distributional concerns should not be considered on the basis of any one tax but rather the system as a whole. Furthermore, one can not expect each individual tax to be redistributive. The FFC felt that a sustained increase of PIT was a bad idea as it is tax on savings which are needed for economic growth.

In addition, the FFC thinks the raise in PIT will be harmful if it continues in the long run. However, in the short-run it may be necessary and useful. Taxing the rich does not reduce consumption much as they spend a small portion of their income. But in the long-term the cost to investment is concerning.

The Commission reiterated the point it raised in its 2016 Medium Term Budget Policy Statement (MTBPS) submission, that regular road maintenance and a well-maintained road network are key to economic development and growth. Public debt is expected to reach 48.2% of GDP over the next 3 years, up by 3% since 2016. On the basis of a credit-evaluation there is nothing in the budget and the fiscal aggregates tabled by the FCC that would lead an analyst to have a more negative view of the RSA government. He stated again that the country is running an overall surplus which adds to our credibility.

Dr Mkhululi Ncube, Program Manager: Local Government Unit, FFC, stated that the declining trend in economic growth appears to have run its course. Rather than downward revision, there is an upward revision for 2017 and the medium-term. These economic prospects are boosted  by a changing global landscape; there is a strong recovery in the US, rebound in major economies of Western Europe spilling over to the EU, and Chinese stimulus enhancing resource/commodity linked investments. Growth however remains below the needed targets for addressing unemployment and inequality.

In addition, the trade balance is showing signs of improvement in line with moderate commodity price increase. However, we must acknowledge the downside risks: such as the policy direction of the new US administration (increased protectionist pressures), the uncertainty around outcomes of negotiations over Brexit (sentiments against global integration and political dynamics in key EU states), and the sustainability of Chinese stimulus given vulnerabilities of SoEs and nascent credit bubble.

There is a worrisome trend of weakening investment growth working in tandem with low employment levels. This weakness is pronounced within the private sector, where investment growth in 2015 was 2.6% compared to 26% in 2006. The net effect of changes within labour market was an increase in the number of unemployed by 587 000. Government investment expenditure has replaced private investment, which introduces risks especially as government revenues are declining. Debt cost per revenue collected is around 13c per rand collected. This leaves little cash left for investment spending.  Encouraging private investment is therefore crucial, especially for unemployment.

There has also been a sharp contraction in the agricultural sector. While a rebound is expected on the back of good rainfall, there will be a lag in recovery to 2012 levels. The drought has also impacted water and electricity sectors. In addition, the fiscal consolidation outline in the budget falls heavily on taxation; because of this households are unable to consume, which has an adverse effect on sectors like agriculture.

Mr Carrim intervened, saying that the presentation can not go on for longer than 5 minutes, so that there is time at the end for it to be discussed.

An unidentified member of the FCC continued the presentation. For the sake of time, he skipped to the last concluding slide. He stated that the Commission fully supports Government’s position on ‘gradual’ fiscal consolidation and tabling Fiscal Frameworks with a positive primary balance and tightening measures to maintain expenditure sustainability. He was supportive of the moderate rise in public debt and debt servicing costs while limiting negative impact on future growth and protects much needed social services. But he argued that the rise in PIT should not become a trend – it should only be seen as a necessary short term measure. More needs to be done to reignite higher economic growth consistent with NDP and also requires structural reforms that include: measures to raise total savings, structural and economic reforms in product, service and labour markets, reinvigorating agriculture and rural development, 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.  Labour absorption in manufacturing is also a problem – and it is lower than other countries. The same is true in rural development. But manufacturing alone can not cover the unemployment rate; rather rural development and agricultural interventions are crucial.

Dr Mabulu stated that the FFC should be given their constitutional status in this forum; they need to be recognised in this way and afforded the appropriate time to deal with these matters.

Mr Carrim agreed. The floor was then opened to members to ask questions. 

Discussion

Mr S Buthelezi (ANC) mentioned corporate income tax (CIT), and that savings are not necessarily invested. He felt that the VAT hike is a soft target but that CIT is a better avenue for increasing taxes. If government expenditure had not been high since 2008 the country would have gone into recession.  The private sector is not investing especially not direct fixed investment. Inequality is a massive vulnerability. Unequal societies are unstable and this leads to a low investment. These inequalities still go only racial lines: rich are white and poor are black. That is another risk as it leads to anger.

Mr Maynier stated that the private sector investment is low because of utterances made by the ANC Youth League. In his view, the hearing would be more productive if the PBO and FFC rooted there presentations in the Money Bills Act which requires Parliament to consider seven factors which have not been properly addressed today. One of these is whether the debt levels and debt payments are reasonable. The PBO was incoherent in answering the question of debt. This year the FFC was coherent. The question of the PBOs independent view on debt was not answered however.

Ms T Tobias (ANC) said that there were two policies that the FFC raised that need further discussion: the first regards the optimal debt level; what is it? The second is whether the overall tax system is redistributive or regressive?  She did not believe that there is a one-size-fits all solution to this. She went on to provide an anecdote: the FFC says let’s not overburden manufacturing, but army worms are deployed in the African continent. Cheap imports are threatening manufacturing. The competitive environment is tough.

She then argued for the need for long term investment certainty. But the difficult in the South African context, in an unequal society, a [regressive] VAT, will burden the unemployed and the poor. The CIT has been a burden on them. She then repeated the point made by Mr Buthelezi: that there is an emotional element to the problem, and there is a need for immediate inputs to deal with this. VAT as a tool is tough to go for as it harms the poor but such decisions are necessary. However, in the long run CIT is a better option as it does not harm the poorest consumer. In response to Mr Maynier: she claimed the ANC has incentives for private investment.

Ms S Shope-Sithole (ANC) was concerned about the FCCs comments regarding VAT and how it is preferable. She argued that the FFC would not suggest this if they had first-hand experiences of those living in poverty. Additionally, it also suggests that they do not understand the political economic context of the country internationally. Trump and Brexit woke people up to the fact that ordinary Americans and Britons felt “upset” by their circumstances; we must now appreciate the plight of the ordinary citizen and the urgency of addressing their needs. If we don’t, we may end up with an unfortunate or unexpected political situation. A VAT hike will cause immense pain for the ordinary person.

Mr Topham supported Mr Buthelezi’s concern about inequality. He added that the cards are stacked against the poor. What you seem to be saying as the FFC in terms of practical tools to reduce this gap is: investment is too low. But there are other factors too. The point to invigorate agriculture is unsubstantiated and unhelpful. He concluded by requesting the FCC give better advice on what can be done. You want to be taken seriously, but you have to earn that.

Dr Mabulu stated that Members must read over the previous submissions of the FFC. For example, the FFC had made a submissions regarding agriculture development to this House last month, and he is sure that not many Members read through it.  He repeated this point several times: that Members must read over the previous submissions of the FFC to engage with the recomendations they had already made. These will give members more detail.

With regards to the other questions, he requested they submit questions in writing and he will respond in kind. He then repeated his earlier point about reading previous submissions. He argued that Members do not ask the right questions and they would ask the right ones if they read over FFC submissions thoroughly. He also stated that this is a result of the management process.

Mr Gcwabaza stated that he did not appreciate the lecture that the Members had just received. He felt it to be condescending and done in bad faith.

Mr Carrim intervened, saying that FFC must answer at least one questions posed by the members in the last minute of the session.

Dr Ncube explained to Members that they must remember why taxes are being raised in the first place: for redistribution. That revenue generated from taxes will be used in redistribution schemes. Thus, he declared, we should not be talking about if these tax methods are regressive or not, but rather discuss what the intended uses of the generated revenue are.

Mr Carrim expressed sympathy to their concerns of the FFC regarding the constraints surrounding this process; but he also felt that they could do a better job in steering these committees in the direction of their findings. In addition, he determined the submissions of the FFC as dense and at times inaccessible, but it is not to say that members of the committees do not need to do more on their side as well.

To conclude, Mr Carrim called on members to submit questions in 48 hours for the PBO and FFC to answer on Friday.

The meeting was adjourned.

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