2017 MTBPS: National Treasury response to submissions

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Finance Standing Committee

03 November 2017
Chairperson: Mr Y Carrim (ANC)
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Meeting Summary

National Treasury appeared before the Standing and Select Committees on Finance to give responses to submissions received during public hearings on the Medium Term Budget Policy Statement. It welcomed the robust debates and contributions to macroeconomic policymaking.

In response to the Parliamentary Budget Office’s (PBO) submission on fiscal consolidation and economic growth, government has repeatedly raised the dilemma of economic growth and fiscal consolidation. Fiscal consolidation has been a “headwind” in respect of economic growth in recent years. However, other factors (domestic and international, structural and cyclical) have played a far stronger role in the secular deceleration of growth in the last decade. It is highly doubtful that fiscal demand stimulus would have changed the direction of the growth trajectory. Failure to consolidate could have worsened growth outcomes as a result of adverse market reactions, higher interest rates and capital outflows. Going forward, it is unlikely that South Africa can consolidate itself into fiscal sustainability, without measures to enhance growth.

National Treasury outlined and explained the factors behind revenue under-collection. The period of revenue buoyancy appears to have run its course. Revenue growth outpaced GDP between 2011 and 2015 - partly the result of tax policy, partly the result of underlying economic trends. Revenue weakness reflects a number of economic factors such as: growth in key sectors having slowed; moderate wage settlements, job losses and a slower employment growth; persistently weak growth and commodity price volatility in mining sector; sharp contraction in imports, as well as stabilisation of the rand. Other factors could include: behavioural responses to tax increases; compliance concerns and weakening tax morality; and administrative challenges in the South African Revenue Service (SARS). In a nutshell, revenue under-collection reflects slowing economic growth, but may also suggest a profound shift in the relationship between economic growth and tax collection in the years ahead.

On illicit capital flows, estimates of illegal capital flows were generally unreliable as tax and financial crimes are complex and sophisticated crimes, committed by highly skilled and well-connected people with extensive resources. However, capacity to investigate and prosecute people who are engaged in illicit financial activities was critical. Hence, dedicated and highly trained personnel was needed to focus on these complex and sophisticated crimes.

The Congress of South African Trade Unions (COSATU) had submitted that: “… the state is actively reducing the number of jobs available in the public sector.” In response, Treasury stated that since 2011, government has been forced to restrict employee headcount growth to accommodate rising salaries yet spending on compensation continues to grow more quickly than nominal GDP. The Medium Term Expenditure Framework (MTEF) provides for an overall increase of 7.3% a year to accommodate improvements in conditions of service. Many departments are already at risk of exceeding this limit, even assuming that personnel numbers do not increase. Therefore, a fair and reasonable compromise between government and state employees is in the public interest.

Responding to the Fiscal Cliff Study Group (FCSG), it is true, as argued by the FCSG that the combination of mandated expenditures on debt service costs and compensation of employees is crowding out other expenditures, and eroding the effectiveness of the public finance. The FCSG had proposed that Treasury “purchase only vehicles manufactured in South Africa for the government’s vehicle fleet.” Treasury viewed this as an excellent idea, which needs to be addressed in the Ministerial Handbook.

COSATU appreciated Treasury’s responses and honesty of government during the MTBPS presentation. He reiterated COSATU’s frustration about the crises in SOEs such as SAA, Eskom, Denel and others. There seemed to be no sense of urgency on the part of government to take drastic measures to deal with the challenges. Corruption was an everyday language and COSATU called for meaningful intervention to do away with corruption and consequence management for same. It was difficult for workers to be sympathetic to government’s fiscal pressures when there seemed to be little being done in dealing with corruption. Stemming the bleeding and turning SOEs around was paramount.

Members noted that during the MTBPS presentation, the Minister had stated that the forecasted revenue shortfall of R50 billion was largely due to slow economic growth. However, there were other views which attribute the shortfall to a combination of factors. There was need to dig deeper into the issues to address the root causes such as possible inefficiencies in tax collections. Stronger answers on what was to be done to address the revenue shortfall were needed. Also, a platforms had to be created so that the different schools of economic thought pertaining to fiscal consolidation and economic growth are engaged thoroughly. Treasury also needed to be transparent and engage other stakeholders such as labour unions. They made reference to challenges within the South African Revenue Service. If there was a recognition that there were challenges, was Treasury in engagement with SARS in an attempt to deal with the challenges?

Members had to think around what should be included in the final Committee report.

Meeting report

Briefing by National Treasury

Mr Michael Sachs, DDG: Budget Office Division, National Treasury, took the joint committees through responses to public hearings on the Medium-Term Budget Policy Statement (MTBPS). Treasury welcomed the robust debates and proposals as there were no right or wrong answers in macroeconomic policymaking.

In response to the Parliamentary Budget Office’s (PBO) submission on fiscal consolidation and economic growth, government has repeatedly raised the dilemma of economic growth and fiscal consolidation. Fiscal consolidation has been a “headwind” in respect of economic growth in recent years. However, other factors (domestic and international, structural and cyclical) have played a far stronger role in the secular deceleration of growth in the last decade. It is highly doubtful that fiscal demand stimulus would have changed the direction of the growth trajectory. Failure to consolidate could have worsened growth outcomes as a result of adverse market reactions, higher interest rates and capital outflows. Going forward, it is unlikely that South Africa can consolidate itself into fiscal sustainability, without measures to enhance growth. As pointed out in the MTBPS, unless decisive action is taken to chart a new course, the country could remain caught in a cycle of weak growth, mounting government debt, shrinking budgets and rising unemployment. The only sure way forward was to grow ourselves out of the debt trap – to consolidate the fiscus through economic growth.

National Treasury modelling indicates that achieving and sustaining 3% growth would stabilise the debt-to-GDP ratio below 60%. However, it is impossible to achieve this by borrowing more to stimulate demand – even if the multiplier is assumed to be very high, and monetary policy is accommodative. Thus, the Presidential Fiscal Committee was considering proposals to stabilise the debt-to-GDP ratio over the medium term, through measures that would narrow the deficit, stimulate economic growth and build investor confidence.

Mr Sachs outlined and explained the factors behind revenue under-collection. The period of revenue buoyancy appears to have run its course. Revenue growth outpaced GDP between 2011 and 2015 - partly as a result of tax policy and partly the result of underlying economic trends. Revenue weakness reflects a number of economic factors such as: growth in key sectors having slowed; moderate wage settlements, job losses and a slower employment growth; persistently weak growth and commodity price volatility in mining sector; sharp contraction in imports, as well as stabilisation of the rand. Other factors could include: behavioural responses to tax increases; compliance concerns and weakening tax morality; and administrative challenges in the South African Revenue Service (SARS). In a nutshell, revenue under-collection reflects slowing economic growth, but may also suggest a profound shift in the relationship between economic growth and tax collection in the years ahead.

On illicit capital flows, estimates of illegal capital flows were generally unreliable as tax and financial crimes are complex and sophisticated crimes, committed by highly skilled and well-connected people with extensive resources. However, capacity to investigate and prosecute people who are engaged in illicit financial activities was critical. Hence, dedicated and highly trained personnel were needed to focus on these complex and sophisticated crimes. In an effort to increase tax yield from capital flows, stakeholders need to strengthen the transfer pricing audit capacity within SARS, as well as its capacity to implement the transfer pricing country-by-country reporting and audit reportable arrangements. Other law enforcement and regulatory agencies have a critical role to play and these would include: anti-money laundering agencies, the Reserve Bank, and policing and prosecution authorities. No matter how well drafted South African laws may be, without stronger capacity to enforce such laws, the battle against illicit financial flows will not be won. 

The Congress of South African Trade Unions (COSATU) had submitted that: “… the state is actively reducing the number of jobs available in the public sector.” In response, Treasury stated that since 2011, government has been forced to restrict employee headcount growth to accommodate rising salaries yet spending on compensation continues to grow more quickly than nominal GDP. The Medium Term Expenditure Framework (MTEF) provides for an overall increase of 7.3% a year to accommodate improvements in conditions of service. Many departments are already at risk of exceeding this limit, even assuming that personnel numbers do not increase. Therefore, a fair and reasonable compromise between government and state employees is in the public interest.

On equity in government salaries, COSATU had submitted that “[government] must reduce the out of control salaries of State-Owned Enterprises’ CEOs and executives, political office bearers including DGs.” In response, Treasury said high salaries and bonuses in publicly funded entities is of great concern and are being reviewed. Nevertheless, within the public-service there is a growing challenge of salary compression. The highest-paid 1% of public servants receive 23 times the income of the lowest paid 1%. In the private sector the same ratio is 633.

Responding to the Fiscal Cliff Study Group (FCSG), it is true, as argued by the FCSG that the combination of mandated expenditures on debt service costs and compensation of employees is crowding out other expenditures, and eroding the effectiveness of the public finance. The FCSG had proposed that Treasury “purchase only vehicles manufactured in South Africa for the government’s vehicle fleet.” Treasury viewed this as an excellent idea, which needs to be addressed in the Ministerial Handbook.

The FCSG made submissions on the Southern African Customs Union (SACU) revenue sharing arrangement. In response, Treasury agreed that the current SACU revenue sharing arrangement needs to be reformed. It is detrimental to regional economic development, exacerbates fiscal pro-cyclicality and creates dependence on declining revenue sources. Compared with 2017 Budget estimates, South Africa’s payments to SACU have been revised down by about R34 billion over the next two years. This revision is favourable to South Africa since they off-set the downward revision to main budget revenue but they will certainly place South Africa’s SACU partners under fiscal stress in the years ahead. These revisions are driven by a formula defined in the multi-lateral agreement based on estimates of GDP, intra-SACU trade and error-corrections with two-year lag.

During public hearings, the UNICEF emphasised the need to prioritise programmes that benefit children. In response, Treasury viewed the recommendations regarding the preservation of budgets that impact on children's rights as well-taken and helpful. Government remains committed to protecting core social expenditures from the impact of fiscal consolidation measures. Proposals to expand primary health care are at the heart of government’s programme to implement National Health Insurance. Funding for the non-profit organisations service sector is of great concern and a review of the equitable share formula is currently underway, and UNICEF is welcome to engage National Treasury if they have specific proposals in this regard.

During a previous engagement, Members wanted to know about the composition of the presidential fiscal committee. It is constituted by: The President Jacob Zuma; the Deputy President, Mr C Ramaphosa; the Minister in the Presidency, Planning, Monitoring and Evaluation, Mr J Radebe; the Minister of Economic Development, Mr E Patel; the Minister of Energy, Mr D Mahlobo; the Minister of Finance, Mr M Gigaba; the Minister of Science and Technology, Ms G Pandor; and the Deputy Minister of Finance, Mr S Buthelezi.

Discussion

The Chairperson commended the lucidity and clarity of Treasury’s delivery, and invited stakeholder inputs.

Mr Matthew Parks, Parliamentary Coordinator, COSATU, appreciated Treasury’s responses and the honesty of government during the MTBPS presentation. He reiterated COSATU’s frustration about the crises in SOEs such as SAA, Eskom, Denel and others. There seemed to be no sense of urgency on the part of government to take drastic measures to deal with the challenges. Corruption was an everyday language and COSATU called for meaningful intervention to do away with corruption and consequence management for same. It was difficult for workers to be sympathetic to government’s fiscal pressures when there seemed to be little being done in dealing with corruption. Stemming the bleeding and turning SOEs around was paramount. However, he gave credit to government on the recently gazetted minimum wage as it would help in closing the existing huge wage gap.

Mr D Hanekom (ANC) noted that during the MTBPS presentation, the Minister had stated that the forecasted revenue shortfall of R50 billion was largely due to slow economic growth. However, there were other views which attribute the shortfall to a combination of factors. There was need to dig deeper into the issues to address the root causes such as possible inefficiencies in tax collections. Stronger answers on what was to be done to address the revenue shortfall were needed.

Ms T Tobias (ANC) said a platform had to be created so that the different schools of economic thought pertaining to fiscal consolidation and economic growth are engaged thoroughly. Also, the structure of the tax policy had to be looked into. Treasury also needed to be transparent and engage other stakeholders such as labour unions. She was appreciative of Treasury’s measured responses on economic growth and fiscal consolidation dynamics.

Mr D Maynier (DA) said Treasury decided not to take any meaningful decisions amid all the enormous challenges. This was a monumental failure by government. He suggested an interaction with the Minister or Deputy Minister, which would shed light on decision-making at cabinet level. He asked for assurance that Treasury had received his written questions and would get written responses to same.

Mr Sachs said Mr Maynier’s questions had not been received yet but would liaise with the secretaries to ensure that the responses are furnished within a reasonable timeframe.

Mr A Lees (DA) made reference to challenges within SARS. If there was a recognition that there were challenges, was Treasury in engagement with SARS in an attempt to deal with the challenges?

The Chairperson suggested that all the submissions received from the Fiscal Cliff Study Group be responded to within 14 days, and the Committees be furnished with the responses as well. Secondly, on contingent liability, Treasury should consider providing full information or provide the Committees with a reason consistent with the Constitution and legislative norms and rules on why this could not be done. He asked Members to think around what should be included in the final Committee report.

Mr Sachs, in response, underscored that the definition of economic stimulus was broad but confidence was the cheapest form of stimulus. Confidence boosting measures could stimulate the economy by leading to more favourable investment decisions. They have quite an immediate effect on growth, such as unblocking regulatory constraints in various sectors. Policy certainty was key and policy options were more about the context. On whether some of the debates in mainstream economics applied in developing countries such as South Africa, this was still an open question. He suggested a workshop where Treasury and other stakeholders from civil society would share perspectives and educate each other on the various economic debates. The Minister had sent a letter to the chairpersons of the Money Bills committees proposing a principle. There seems to be two budgets every year; one in October and the other in February, and the same processes were being applied to both. Treasury suggested that the October process focus much more in-depth on the fiscal and macroeconomic aspects of budgeting whereas the February process focus much more on the appropriations aspect such that the processes are not repeated twice every year. Essentially, the post-MTBPS discussions would be devoted to fiscal and macroeconomic policy debates without much consideration of appropriations, then February would be entirely be devoted to appropriation. The proposal would be formally tabled before the Committees.

The Chairperson stated that there had not been any debates on the Minister and Treasury’s suggestions. The proposals as being articulated by Mr Sachs were totally new to Members. However, he was agreeable to the proposal. He suggested that Treasury be available during the Money Bills Act deliberations. The current structure also had to do with the programming of parliamentary work. Also, the workshop format had been tried before but was a dismal failure due to poor attendance. If people were committed, then it could be done. The proposals were welcome and would be considered objectively. He asked if there were any issues that Members felt should be put into the report.

Ms Tobias said the implementation of the tax policy and the how it to could be made to be consistent with how Treasury would want to raise revenue had to be considered.

The Democratic Alliance would discuss and send its proposals later.

The meeting was adjourned.

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