2017 Medium Term Budget Policy Statement: Parliamentary Budget Office briefing

This premium content has been made freely available

Finance Standing Committee

31 October 2017
Chairperson: Ms Y Phosa; Mr Y Carrim; Mr C De Beer (ANC)
Share this page:

Meeting Summary

The Parliamentary Budget Office (PBO) appeared before the joint committees of Finance and Appropriations (National Assembly and National Council of Provinces) to give a post Medium-Term Budget Policy Statement (MTBPS) analysis.

The PBO noted that performance of key macroeconomic variables over the past five years has not been impressive. The MTBPS acknowledged that debt to GDP ratio has continued to widen as economic growth rates have declined. MTBPS chooses to continue fiscal consolidation and urges greater effort in microeconomic interventions to increase economic growth. However, poor economic growth prospects and low public expenditure may have a negative impact on the success of microeconomic interventions. Hence, consideration should be given to the impact of continued fiscal consolidation on the economy. Members had to ask if fiscal consolidation was still a viable medium-term fiscal policy objective of government.

The PBO highlighted tax revenue issues and developments. Tax buoyancy was falling and is estimated to dip by 1.02 percentage points in 2017/18. Members had to consider how tax buoyancy (movement) could affect public finances, and whether tax buoyancy had been affected by structural or recent discretionary tax changes. Furthermore, Members had to look into challenges facing State-Owned Entities (SOEs), their legislated mandates as well as their financial position. It had to be explored whether hiring executives and appointing boards alone could address challenges facing SOEs and the implications thereof for public finance. In its fiscal oversight, Parliament may also need to consider a long-term perspective about SOEs’ fiscal situation relative to public finances and development objectives. Continuous monitoring of compliance with funding conditions was also crucial.

Members asked for advice as to how they could best deal with SOEs given the myriad of challenges within the space. What could Parliament consider as part of its recommendations in turning around SOE operations?

They also emphasised the need for robust cost-cutting measures given the fiscal constraints the country was grappling with. Revenue shortfalls were not a good story to tell. In the PBO’s opinion, what could be the possible effect of this on the country’s sovereignty? The Democratic Alliance felt the PBO’s position was that government should abandon fiscal consolidation as a means of stimulating the economy. Was that the thrust of the PBO’s argument and how would this be realised?

The PBO was asked to do a brief paper on budget reform, alternatives to fiscal consolidation and a critique on infrastructure-led growth policy framework. 

Meeting report

Chairpersons’ opening remarks
Ms Phosa welcomed everyone and urged Members to come up with proposals to turn around and develop the economy moving forward.

Mr De Beer said the Minister of Finance had to be applauded for giving Members and the nation the real picture of the country’s finances. Reigniting economic growth was not only the role of Treasury and the Reserve Bank but the nation at large.

Parliamentary Budget Office presentation
Prof Mohammed Jahed, Director, PBO, gave the context of the Medium-Term Budget Policy Statement (MTBPS) analysis. Parliament was expected to consider and examine: explanations and assumptions of the macroeconomic and fiscal position; revised fiscal framework; three years spending priorities, and proposed division of revenue and adjustment budget. The performance of key macroeconomic variables over the past five years has not been impressive. The MTBPS acknowledged that debt to GDP ratio has continued to widen as economic growth rates have declined. The MTBPS chooses to continue fiscal consolidation and urges greater effort in microeconomic interventions to increase economic growth. However, continued poor growth and low public expenditure may have a negative impact on the success of microeconomic interventions. Hence, consideration should be given to the impact of continued fiscal consolidation on the economy.

Mr Seeraj Mohamed, Deputy Director: Economics, PBO, noted that fiscal consolidation targets were slipping away, with the outlook for growth and revenue being poor. The fiscal objective of stabilising debt as share of GDP over the medium term did not appear likely and a primary surplus will not be realised in 2018/19 as projected in the 2017 Budget Review- government will continue borrowing to meet non-interest expenditure. Therefore, the joint committees had to ask if fiscal consolidation was still a viable medium-term fiscal policy objective of government. There were questions about the macroeconomic approach in the 2017 MTBPS. MTBPS proposed hard choices as a means to return the public finances to a sustainable position. It further proposed increased effort at microeconomic level interventions to stimulate the economy and improve regulation and competitiveness of manufactured exports, and re-industrialisation. However, the effectiveness of microeconomic interventions was likely to be severely thwarted by a low growth macroeconomic environment–even if global conditions support increased export. A low growth macroeconomic environment is likely to severely constrain the effectiveness of microeconomic interventions.

Dr Dumisani Jantjies, Deputy Director: Finance, PBO, highlighted tax revenue issues and developments. Tax buoyancy was falling and is estimated to dip by 1.02 percentage points in 2017/18. Members had to consider how tax buoyancy (movement) could affect public finances, and whether tax buoyancy had been affected by structural or recent discretionary tax changes. Also, does this signal structural issues in tax revenue mobilization, and how may this be dealt with over the long-term? On 2017/18 revenue targets, forecasts suggest that the worst case scenario would be a R69.9 billion shortfall whereas the best case scenario would see a R31.7 billion shortfall in tax revenue.

Furthermore, Members had to look into challenges facing State-Owned Entities (SOEs), their legislated mandates as well as their financial position. It had to be explored whether hiring executives and appointing boards alone could address challenges facing SOEs and the implications thereof for public finance. In its fiscal oversight, Parliament may also need to consider a long-term perspective about SOEs fiscal situation relative to public finances and development objectives. Continuous monitoring of the compliance with funding conditions was also crucial.

Discussion
Mr A Lees (DA) commented on government transfers and subsidies. He asked for an indication of the full breakdown so as to get a better idea of government expenditure for 2017/18.

Mr D Maynier (DA) asked if fiscal consolidation remained a policy objective of government. He felt the PBO’s position was that government should abandon the fiscal consolidation path as a means of stimulating the economy. Was that the thrust of the PBO’s argument and how would this be realised?

Mr A Shaik-Emam (NFP) asked for advice as to how Members could best deal with SOEs given the myriad of challenges within the space. He emphasised the need for robust cost-cutting measures given the fiscal constraints the country was grappling with.

Mr F Essak (DA) said revenue shortfalls were not a good story to tell. In the PBO’s opinion, what could be the possible effect of this on the country’s sovereignty?

Ms Phosa noted the challenges in SOEs. What could Parliament consider as part of its recommendations in turning around SOE operations?

Prof Jahed, in response, pointed out the need for engaging in meaningful debates on the issues raised as opposed to having the PBO providing the answers. The PBO was merely stating that fiscal consolidation did not seem to yield intended objectives. With the country’s economic policy thrust having been about enabling economic growth whilst maintaining a strong social safety net, fiscal consolidation seems to have brought the economy into its current position of low growth margins, depressed revenue collection and unemployment. Therefore, budget reforms would be an important aspect of the policy mix going forward. The PBO had no definite answers but was raising the points for consideration by the joint committees. On challenges in SOEs, Members had to consider why SOEs were introduced in the first place; their purpose. The point of departure would be that they were meant to address market failures, which was the case in other countries as well.

Mr Mohamed replied that the PBO had no definite position on fiscal consolidation but was outlining the terms of reference for debates on same. Fiscal consolidation, its benefit and downsides, has been an ongoing debate in both the developing and developed world. It would be remiss for the PBO not to bring up the arguments as brought up by mainstream economists. SOE performance was also affected by levels of economic growth. Transfers and subsidies amounted to R500 billion in the current year for all spheres of government. He identified the need to think about tax buoyancy in relation to tax revenue collection.

Mr De Beer said the PBO should look into models from other countries on whether fiscal consolidation was the best policy under the prevailing conditions.

Mr B Topham (DA) asked what the PBO thought could be the best avenue for boosting economic performance in the event that fiscal consolidation is abandoned in favour of a more expansionary path.

Ms Phosa asked about the alternatives available as a means to stimulate growth were the country to move away from fiscal consolidation. On the projected growth of debt to GDP ratio in the next three years, the concern was that the forecasts did not even include some programmes deemed necessary. She asked for advice on the necessary interventions Members could come up with. 

Ms S Shope-Sithole (ANC) said sparse empirical evidence showed that “belt tightening” could help in reigniting economic growth. The reality was that in an event the economy is not growing, government must increase investment expenditure to compensate for subdued levels of private investment. Austerity measures have not been proven to be effective. She urged stakeholders and Members to engage in the debate around the right path to follow thoroughly.
 
Prof Jahed said Members may need to look into the budget framework and resource allocation in the economy mindful of the current economic climate. It was correct that increasing government expenditure had to be well-thought out. Spending on infrastructural investments has always been a big avenue to boost economic activity. However, the huge risks and the long-term implications of such a policy path had to be envisioned. Treasury and other stakeholders would need to bring proposals supported by theoretical models and simulations on the multiplier effects of such interventions.

Mr Carrim said it was useful to get the diverse views from the PBO but urged the joint committees to guard against turning meetings into a philosophy seminar. Members needed answers. He asked the PBO to do a brief paper on budget reform, alternatives to fiscal consolidation and a critique on infrastructure-led growth policy framework.

The meeting was adjourned. 

Share this page: