Committee Report on 2018/19 Budget

Meeting report

Ms Tobias welcomed everyone and indicated that the draft Fiscal Framework and Revenue Proposals report was sent to Members the previous day, thus they had ample time to go through it. She asked the Committee Secretary to take the Joint Committee through the report.

Mr A Lees (DA) pointed out that the DA had sent its resolutions to Members. He asked the Joint Committee to deal with the resolutions first before considering the report, as the outcome of the discussions on the resolutions may well form a part of the Committee report.

Ms Tobias indicated that there was no rule which states that a party resolution could form part of a Committee report. Members would be asked to make inputs before voting on the report. The Joint Committee would then decide on whether to incorporate the inputs or not. Mr Lees would be given an opportunity to present his party resolutions after the report was read out. She asked the Parliamentary Legal Advisor to clarify on the procedure.

Adv Frank Jenkins, Senior Parliamentary Legal Advisor, said there was no definitive rule determining Committee procedure in such an instance but the Joint Committee could decide on the process on whether the substance of party resolutions are discussed before or after the Joint Committee goes through the report.

Mr O Terblanche (DA) said from the Select Committee on Finance side, the DA had handed its resolution in terms of NCOP Rule 102(4).

Ms Tobias indicated that Members of the Select Committee would also have their own processes in terms of the adoption of the report as they would vote separately.

Members of the DA interjected, and asked why then this was a joint meeting.

Ms Tobias expressed her displeasure over the interjection. She had spelt out the procedure to be followed and Members would have an opportunity to air their views at the end, after the report was considered. Having the DA not wanting the report to be considered in the first instance was quite unusual

Mr M Monakedi (ANC) agreed with the Acting Co-Chairperson and commented that the DA was pushing its party positions in a manner that was not procedural. The report recommendations should be read out and Members could expand and make input afterwards.

Mr F Essack (DA) said he had a problem because whatever was to be adopted during the Joint Committee meeting would be seemingly final. Members of the Select Committee would then be expected to vote on the report as is. It turned out to be a rubberstamping exercise for the Select Committee side. That was why Mr Lees should be given an opportunity to table the resolution before the report was read out.

Ms Tobias felt Members were pre-empting the discussion outcomes by assuming that their inputs would not be taken into account. Standard procedure had to be followed- report recommendations should be read out and Members would be expected to make their inputs thereafter. She once again asked the Committee Secretary to take the Joint Committee through the observations and recommendations of the report on the fiscal framework and revenue proposals.  

Fiscal Framework and Revenue Proposals (Budget) Report presentation

Mr Allan Wicomb, Committee Secretary, Standing Committee on Finance, took the Joint Committee through the observations and recommendations of the report. The main highlights of the report were as follows: The Joint Committee noted that the 2018 Budget was probably the most difficult and challenging since the dawn of democracy. The Committee acknowledged that the budget was tabled under difficult economic conditions of low growth, revenue shortfall, fee-free education bill and rising debt levels and the difficult choices it has to make.  Some progress has been made in implementing the 14 confidence boosting measures that the Minister of Finance started implementing from 2017. The Committees urged National Treasury to rigorously implement the rest of the 14 confidence boosting measures to unlock South Africa’s growth potential and report progress quarterly to the Committees, taking into account the President’s 10-point plan announced in the state of the nation address of 2018.  

Should Parliament reject the VAT increase through the Fiscal Framework, alternatives to raise an estimated R22.9 billion during the 2018/19 financial year, instead of through the VAT increase would have to be proposed. Given the tight timeframes and the onerous requirements of the Money Bills Act this was difficult to do. Even if the Committees reject the VAT increase through the Fiscal Framework it will still be implemented on 1 April in terms of the legal provision in s7(4) of the Value-Added Tax Act. It will continue to apply for a 12-month period from the date of the budget and will only lapse at the beginning of the next financial year if it is not given effect through the passing of the Rates and Revenue Bill through which the VAT increase can be rejected. The two Houses of Parliament normally vote on this Bill in November of each year following its formal introduction by the Minister with the Medium Term Budget Policy Statement, usually done in October. Usually tax increases in a Rates Bill are kept confidential until the budget speech. Consultation starts after the budget speech. After consultation the Bill goes to Cabinet and is then tabled in Parliament. The current practice is for the Minister for first release a DRAFT Bill and only table a FINAL Bill after the Finance Committees have completed their hearings and finalised the Bill. In view of the strong views about the VAT increase the Standing Committee of Finance has brought forward the briefing to the first week of the second quarter of the parliamentary term – and the hearings will begin before the end of April.  The public will therefore have more time to make considered submissions on the VAT increase then.

VAT increase – some issues

The Committees understood the pressures on government to raise additional revenue. They noted, among other issues:

• The R48, 2 billion revenue shortfall in the 2017/18 financial year.
• Concerns as South Africa may move towards an unsustainable debt-to-GDP ratio.
• The threat of a further ratings downgrade, which will increase the cost of funding and hence of debt servicing.
• The need to avoid approaching the multi-lateral institutions to raise debt and erode the country’s fiscal sovereignty.
• The risks that the State-Owned Enterprises pose.
• The need to fund fee-free education for families earning less than R350 000.
• The need to accelerate the rollout of National Health Insurance
• The additional funding necessary for the Expanded Public Works Programme and the Community Works and Early Childhood Development programmes.

The Committees would give concerted attention to the VAT increase in the processing of the Rates and Monetary Bill. They will take into account the further submissions received at the public hearings on the Bill. But based on the hearings on the Fiscal Framework and consideration of the issues so far, they believe that the following issues need to be processed further:

• While it was accepted that the VAT increase must be located in terms of the whole tax system which is, in fact, redistributive, the Committees do not at this stage accept the argument that the VAT increase is ‘neutral’ or even mildly progressive. There may be some technical substance to some of the strands of this argument, but the fact is that the poor people and lower income earners will have to pay more for their basic needs. Members had to be responsive to their needs and interests.
• Members were also not convinced by the argument that the VAT increase is justified as the current rate is lower than the global and African average as this does not take into account that our country has the most acute income inequalities in the world.
• While it was accepted that the zero rating of basic food items, paraffin and the above inflation social grant increases will cushion the effects of the VAT increase on significant sections of the poor and low-income earners, these measures will not be enough. National Treasury had not provided evidence of this either.
• Members were aware of the concerns that businesses sometimes abuse zero-rating but strongly believe that the list of zero-rated items needs to be expanded taking into account the needs of the poor and low-income earners. This should not be restricted to food items, but should possibly include such necessities as school uniforms, text books, stationary, medicines, soap and sanitary towels. Other alternative measures such as linking the SASSA card to zero rated products, expanding school feeding schemes to include high school learners; food stamps and vouchers need to be explored. There was need for a full discussion on this and look into alternative sources of revenue to make up for the loss in VAT with this extension of zero-rated items.
• While recognising the administrative difficulties and complexities, Members believed that consideration needs to be given to more effective targeting of basic food items to be zero-rated to ensure that it is the poor and lower income earners who benefit more. Consideration should also be given to what categories or types within the same item should be zero-rated. For example, while apples, bananas and oranges are zero-rated should kiwi-fruit be? While onions, potatoes and tomatoes are zero-rated, should Brussel sprouts and turnips be?
• While recognising the administrative difficulties and complexities, consideration needs to be given, over time, to incrementally introducing a multi-rated VAT system in which VAT on luxury goods is higher than VAT on goods bought by the poor and lower income earners. The Committees needed to know why this is difficult to do in a phased manner.

The Committees believe that government needs to do much more to reduce corruption and wasteful and unnecessary expenditure and significantly improve the efficiency and quality of spending. The government also needs to stop funding programmes that are not making any progress and do not serve the country’s developmental goals. While costs on travel, accommodation, catering, organising of conferences, renting of buildings and the use of consultants has been declining in real terms much more needs and can be done to reduce unnecessary expenditure. We request that the Standing and Select Committees on Appropriations concertedly explore how this can be done.

Higher economic growth rates will contribute towards easing the pressure to rely on VAT increases for revenue.  National Treasury needs to look into other forms of raising taxes apart from VAT.  Among other options, the majority of the Committee members believe that consideration needs to be given to increasing ad valorem excise duties on luxury goods, estate duty rates for the wealthy and inheritance taxes, and investigating the possibility of either a net-wealth tax or an additional tax on immovable property. Members also urged that the Davis Tax Committee to finalise its work on a wealth tax reasonably soon.

National Treasury must fully engage in a variety of workshops and through other ways with stakeholders, especially those who oppose the VAT increase, before the late April public hearings on the Draft Rates and Monetary Bill. National Treasury is required to conduct an ongoing impact study on the effect of the VAT increase on the poor and low-income earners and report to our Committees on this every quarter. If there are sufficient measures to offset the negative consequences of the VAT increase, the Committees believe that it might be reasonable to accept the VAT increase provided it is reviewed within 2 years.  

On the fuel levy increase, the Committees expressed their concern about the fuel levy increase and will engage further with National Treasury on the need for this in their Quarterly Briefings. They noted that 30 of the 52 cents fuel levy increase is for the ailing Road Accident Fund. The Committees urge the Ministry of Transport to attend to the challenges of the Road Accident Fund and to process the tabled Road Accident Fund Benefits Bill that seeks to address some of these as soon as possible.

Members noted that government is considering a private-sector participation framework in state-owned companies. The Committees require more details on this framework.  As the majority in the Committees have repeatedly said, they support private sector participation in SOEs, including through equity ownership, but do not support privatization of SOEs that serve the country’s developmental goals.

On the Commission on the South African Revenue Service (SARS), the Committees urged the President to establish the Commission on SARS as soon as possible. Part of its mandate should include investigation into how SARS has managed the allegations against Mr Jonas Makwakwa and Ms Kerry-Ann Elskie. It should also investigate the legitimacy of SARS disbandment of the High Risk Investigation Unit - the so-called “rogue” intelligence unit – including through considering the significance of KPMG’s withdrawal of its recommendations on this unit.  While representivity in the senior management and SARS more generally was fully supported, and have been constantly focusing on the need for this, Members said the Commission should also look into the exodus of senior staff in recent years.

In conclusion, the majority in the Committees recommended that the Fiscal Framework be adopted, taking into account the qualifications raised in this report, in particular the concerns about the VAT increase and the need for further consideration of these concerns in the processing of the Rates and Monetary Bill that deals with the VAT increases directly. Members thanked the former Minister and Deputy Minister for their contributions, and welcome the appointment of the new Minister and Deputy Minister.

Discussion

Mr Lees read out the draft resolution which the DA wanted included in the report as follows: the Standing Committee on Finance notes that the increase in VAT as proposed by the Minister of Finance in the 2018 Budget would make it more difficult for poor South Africans to be able to provide for their family. The Committee therefore resolves to recommend to Parliament, that the 2018/19 fiscal framework as proposed, be amended by rejecting the one percentage point VAT hike and reducing government expenditure by R22.9 billion.

There is no need for the 1,0% VAT hike to punish the poor for the maladministration of the ANC as well as for the rampant state corruption over the past nine years. The DA pointed out that instead of increasing the VAT it would be entirely possible to cut the equivalent amount out of the bloated expenditure budget:

• Reduce the number of ministries to 15 with a R 122,0 million savings.
• An additional 6% reduction on all mandatory cost containment items with a R 5,3 billion saving.
• Freeze public office bearers salaries with a R 547,0 million saving.
• Freeze public servants salaries and performance bonuses with a R 50,0 billion saving

The DA also pointed out that there were assets that could be sold:

• Telkom shares with a market value of about R 7,0 billion.
• Broadband spectrum that could realise R 20,0 billion.
• Unused and unneeded State-owned land that could easily realise R 6,0 billion.

Mr Essack said party politics aside, Mr Lees’ proposal was necessary as it would provide reprieve to the poor. It was best for Members and the country as a whole to adopt the resolution.

Mr De Beer said the need to finance expenditures to cater for the poor was well-captured in the report. Members had to look at the bigger picture. The Minister of Finance as well as Members were expected to consult and review the list of zero-rated items and report back to their respective Committees as part of measures to reduce the impact of the VAT increase on the poor. He proposed that the resolution not be taken up as the report recommendations were very clear.

Mr T Motlashuping (ANC) proposed that the Committees adopt the report as is without the DA resolutions.

Mr Essack said it was not fitting for Mr Motlashuping to make such a recommendation. He felt Mr Motlashuping, as a Member of the National Council of Provinces (NCOP), could only make such a recommendation during a separate Select Committee meeting.

Ms Tobias said Mr Essack’s comment could not be sustained as Members of the Select Committee were also open to make their inputs during the Joint Committee meeting.

Mr Essack reiterated that Joint Committee meetings were problematic. The Select Committee process should be allowed to unfold separately. It was unfair for Members of the Select Committee to be expected to rubberstamp the recommendations at the NCOP.

Ms Tobias made it clear that there was a difference between a discussion and an adoption. The Joint Committee was still at the discussion stages, and the NCOP, as a standalone House, would be given an opportunity reconsider and adopt the report on its own merits. If the DA was not happy that the National Assembly had not adopted its resolutions, they could still deal with same at NCOP level. He begged for Members’ indulgence.

Mr Monakedi said the report was a true reflection of what transpired during previous engagements and interactions with various stakeholders during public hearings. The challenges confronting the country required concerted efforts and the proposals which had found expression in the report were not new. He moved for the adoption of the report as is.

Ms D Mahlangu (ANC) failed to understand why there were such divergent views on the process when it was not the first time that the two Committees were holding joint meetings on the fiscal framework.

Mr Tobias noted that, as per the report, even if the VAT increase was rejected through the Fiscal Framework it would still be implemented on 1 April in terms of the legal provision in s7(4) of the Value-Added Tax Act. It would continue to apply for a 12-month period from the date of the budget and will only lapse at the beginning of the next financial year if it was not given effect through the passing of the Rates and Revenue Bill through which the VAT increase can be rejected. She believed the issues being discussed had been adequately captured in the report.

Mr Lees noted that the report did not capture the recommendations from the DA. He wanted it to be on record that the ANC had rejected a fiscal framework which would eliminate the need for a 1% increase in VAT. The DA did not believe there was need for any tax increases at all during this financial year. The position was that expenditure should be cut by at least R22 billion to alleviate the need for VAT. He noted that reducing the number of ministries to 15; an additional 6% reduction on all mandatory cost containment items; freezing public office bearers’ salaries; freezing public servants salaries and performance bonuses would lead to significant savings of at least R22 billion or even more. The DA was opposed to any tax increase.

Ms Tobias noted that during the state of the nation address (SONA), the President made cost-containment commitments which were further cemented by the Minister of Finance during the Budget Speech. All Members had a right to have their various interpretations but the majority view would have to prevail.

Ms P Mabe (ANC) said the DA was putting unnecessary demands as part of its canvassing towards elections. She noted that the report was clear on the need to mitigate the impact of the proposed VAT increase on the poor.

Mr De Beer said some of the proposals by the DA would fall under the Division of Revenue Bill, which was the Standing and Select Committees on Appropriations’ purview.

Mr Lees said the DA had requested that the Treasury furnish the Committees with details on the proposal to review zero-rated items as part of the VAT increase regime. The deadline for Treasury to provide details on the process and timelines had been set for 15 March.

Mr Motlashuping rejected Mr Lees’ proposal citing that the report had already articulated how the review process would be undertaken.

Mr Lees said in terms of employee compensation adjustments as outlined in the 2018 Budget, the DA had requested that it get a detailed analysis of seniority increases, performance bonuses and others as part of a comprehensive review of government’s remuneration structure.

Mr De Beer noted that Mr Lees’ request was captured in the various sections of the report. It was also raised by a number of stakeholders and discussed during public hearings.

Ms Tobias said a brief section could be added as a means of concretising the point raised by Mr Lees.

Mr Lees said the comprehensive review on government spending was not a concept which would only solve problems during the next financial year but in the medium to long term. The comprehensive review would not necessarily be a commitment to anything but it was standard practise in most developed economies.

Mr De Beer noted that Mr Lees’ suggestion was adequately captured on section 5.12 of the report which spoke to the need for Treasury, working together with national departments, provinces and municipalities, to conduct a comprehensive spending review of (1) the composition of spending, (2) the efficiency of spending and (3) future spending priorities on the national health insurance and free-fee education.

Mr Lees said his suggestion had not been adequately captured, in a sense that he was looking at a comprehensive rather than narrow aspects as dealt with in section 5.12. He commented on the risks inherent in some SOEs. It was up to the Joint Committee to assess such risks from a financial point of view. These were important risks to the fiscal framework.

Ms Tobias noted that SOEs would report directly to the respective departments and committees they belonged to. The issues Mr Lees was raising were articulated in the report.

Adoption of the Fiscal Framework and Revenue Proposals Report

Ms Tobias indicated that the majority in the Standing Committee recommend that the Fiscal Framework be adopted, taking into account the qualifications raised in the report, in particular the concerns about the VAT increase and the need for further consideration of these concerns in the processing of the Rates and Monetary Bill that deals with the VAT increases directly. She noted that all corrections and typos would be attended to.

The Fiscal Framework and Revenue Proposals report was adopted by the Standing Committee on Finance with amendments and corrections as put before the Committee.

The DA rejected the Report whereas the UDM reserved its position. 

Mr De Beer recommended that the Select Committee on Finance adopt the Fiscal Framework report.

Mr Terblanche requested that the DA proposals be noted in the report before voting.

Ms T Motara (ANC) said having an addendum to the report as suggested by Mr Terblanche was not provided for in the rules.

Mr De Beer agreed.

The report was adopted and the DA rejected the report. 

The meeting was adjourned.