2018 MTBPS: Minister of Finance briefing; with Deputy Minister present

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Finance Standing Committee

25 October 2018
Chairperson: Mr Y Carrim; Ms Y Phosa; Mr C De Beer (ANC)
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Meeting Summary

2018 Medium Term Budget Policy Statement (MTBPS)
MTPBS Speech & Money Bills

The Standing Committees on Finance and Appropriations together with the Select Committees on Finance and Appropriation met for the MTBPS (medium-term budget policy statement) briefing with National Treasury in the presence of the Minister and Deputy Minister of Finance.

National Treasury said South Africa finds itself at a crossroads. The MTBPS highlighted the difficult economic and fiscal choices confronting government over the next several years. Economic growth has been revised down from 1.5 percent to 0.7 percent in the current year, and the global environment remains challenging for emerging market economies. Government remains committed to fiscal sustainability, but there has been slippage since the 2018 Budget. Tax revenues have been revised down, partly due to higher value-added tax refunds, and despite spending pressures, expenditure ceiling remains intact as the anchor of fiscal policy. Gross debt was now projected to stabilise at 59.6 percent of GDP in 2023/24. Consolidated expenditure was expected to grow by 7.8 percent a year on average, from R1.8 trillion in 2019/20 to R2.1 trillion in 2021/22, prioritising education, social welfare, and health. The President’s economic stimulus and recovery plan aimed to address low economic growth and high unemployment. Elements include an infrastructure fund to be developed in partnership with the private sector, growth and governance-enhancing reforms, and support for urgent education and health needs. State institutions are being repaired and renewed, but serious governance challenges exist across the public sector. In a nutshell, public resources could not be substantially expanded without faster economic growth and job creation. Over the period ahead, government was focusing on reforms that support growth, stabilise state institutions, and improve service delivery. In-year growth outlook had been revised down sharply, and revenue shortfalls for 2018/19 —2020/21 remained significant. Despite spending pressures materialising, the expenditure ceiling remained intact as the anchor of fiscal policy. Real non-interest spending grows by 1.9 per cent per annum prioritising education, social welfare, and health. The weaker growth outlook, medium-term revenue shortfalls, and weaker rand result in debt stabilising at 59.6 per cent of GDP in 2023/24. Key fiscal risks in the period ahead include weak economic growth, uncertainty in the revenue outlook and the poor financial position of state-owned companies.

The Minister of Finance said he had no option but to tell the truth about the state of the economy and the country’s finances during his MTBPS speech. A shrinking economy, reduced tax revenue, and rising government debt are putting public finances under massive pressure. He lamented SA's low growth rate, which is nowhere near levels of 5% in past years, and is as a result of reduced tax revenues. He warned that unless action is taken, the ratio of debt to GDP could reach or top 60% in a few years. At that point the government might have to ask the International Monetary Fund for money which would come with tough conditions. If SA ends up in a debt trap, it will have to go cap in hand to the International Monetary Fund (IMF) for help. This would mean the IMF would take over the running of SA's finances. Whether Members like the IMF or not- ideologically or practically - if SA ends up in a debt trap that was where the country will end up. The numbers in the MTBPS told a tale of bad news, but it was a story that had to be told. There were some in the markets that were not very happy with what they saw as the fiscal stance. There was nothing that could be done about it, Treasury could not spin its way out of the numbers. Treasury had been engaging with international rating agencies, as it does every year after the MTBPS is unveiled. He would not be spinning them either.

Members appreciated the presentation as well as the Minister’s brutal honesty regarding the state of the economy. Having the Minister admitting to the problems facing the country was positive as ignoring them would not solve anything. They noted the overestimation of growth projections which has been happening for a long time, and asked if there were any plans to address this. They asked how non-performing ministries and municipalities would be dealt with without impacting the people negatively. Withholding funding from these delinquent municipalities would only hurt communities. Government’s over-reliance on external service providers and sole focus on procurement should be looked into. What informs the supposition that an above 60% debt to GDP ratio would lead to IMF’s intervention? It appears some of the interventions being proposed were faith-based and without any scientific method to them. There is a huge amount of consternation about the VAT increase that was going to bring in R22 billion. However, reports suggest that- of the expected R22 billion, R11 billion would go to the payment of VAT refund backlogs and R9 billion be used for refund catch-ups in the current year. Supposedly only R2 billion would be available for current expenditure. Additional items had also been zero-rated such that expected revenue would further reduce by R1.7 billion. Therefore, was it correct to conclude that the VAT increase had led to zero contribution towards normal funding of government? The VAT increase would have no contribution to current expenditure. The Co-Chairperson welcomed the candour and head-on confrontation of the challenges. The Minister will be held accountable in this regard. He welcomed the addition of items to the VAT zero-rated list. What other targeted interventions will be brought forth to cushion particularly the poor? He asked how the R24.7bn revenue shortfall came about- given that SARS is monitored per quarter. It appears SARS was possibly "misleading" Parliament. If this was the case then the matter would be referred to the Speaker’s Office. Was Parliament exercising its oversight effectively? He understood the Minister could not possibly be in a position to respond to all questions orally. He directed Treasury to furnish the Joint Committees with written responses within seven days. 

Meeting report

Minister’s opening remarks

Mr Tito Mboweni, Minister of Finance, said he had no option but to tell the truth about the state of the economy and the country’s finances during his MTBPS speech. A shrinking economy, reduced tax revenue, and rising government debt are putting public finances under massive pressure. He lamented SA's low growth rate, which is nowhere near levels of 5% in past years, and is as a result of reduced tax revenues. He warned that unless action is taken, the ratio of debt to GDP could reach or top 60% in a few years. At that point the government might have to ask the International Monetary Fund for money which would come with tough conditions. If SA ends up in a debt trap, it will have to go cap in hand to the International Monetary Fund (IMF) for help. This would mean the IMF would take over the running of SA's finances. Whether Members like the IMF or not- ideologically or practically - if SA ends up in a debt trap that was where the country will end up. The numbers in the MTBPS told a tale of bad news, but it was a story that had to be told. There were some in the markets that were not very happy with what they saw as the fiscal stance. There was nothing that could be done about it. Treasury could not spin its way out of the numbers. Treasury had been engaging with international rating agencies, as it does every year after the MTBPS is unveiled. He would not be spinning them either.

National Treasury presentation

Mr Dondo Mogajane, Director-General, National Treasury, said South Africa finds itself at a crossroads. He echoed the Minister's views on the IMF, and said SA must avoid it at all costs. This MTBPS highlights the difficult economic and fiscal choices confronting government over the next several years. Economic growth has been revised down from 1.5 percent to 0.7 percent in the current year, and the global environment remains challenging for emerging market economies. Government remains committed to fiscal sustainability, but there has been slippage since the 2018 Budget. Tax revenues have been revised down, partly due to higher value-added tax refunds, and despite spending pressures, expenditure ceiling remains intact as the anchor of fiscal policy. Gross debt was now projected to stabilise at 59.6 percent of GDP in 2023/24.

Consolidated expenditure was expected to grow by 7.8 percent a year on average, from R1.8 trillion in 2019/20 to R2.1 trillion in 2021/22, prioritising education, social welfare, and health. The President’s economic stimulus and recovery plan aimed to address low economic growth and high unemployment. Elements include an infrastructure fund to be developed in partnership with the private sector, growth and governance-enhancing reforms, and support for urgent education and health needs. State institutions are being repaired and renewed, but serious governance challenges exist across the public sector.

With state-owned companies identified as a major risk to public finances, initial steps had been taken to reform state-owned companies. Over the past year, new boards and executives had been appointed at Denel, Transnet, South African Express Airways and the Passenger Rail Agency of South Africa. SAA had found R400 million in procurement savings, begun turning profits on most domestic and regional routes, and removed several senior officials linked to malfeasance. The Auditor-General was working with private firms to audit several state-owned companies. To date, previously unreported irregular expenditure amounting to R27billion has come to light. Further, the boards of state-owned companies have initiated forensic investigations into allegations of corruption. The Eskom board was preparing a long-term turnaround strategy to be presented to government in November 2018, and several other entities have recently updated their turnaround strategies

Rebuilding state institutions

Some national, provincial and municipal departments were in financial disarray. The latest Auditor-General findings show increasing levels of irregular spending. Therefore, government has begun the process of rebuilding important state institutions. Part of the processes includes the Judicial Commission of Inquiry into Allegations of State Capture as well as the Commission of Inquiry into Tax Administration and Governance by the South African Revenue Service. Also, National Treasury was making efforts to strengthen financial management through: assisting SARS to regularise VAT refund payments and rebuild capacity; working with the Auditor-General and law enforcement agencies to reduce irregular expenditure in government, while improving transparency to reduce corruption; enhancing capacity-building in local government by deploying skilled professionals to manage and recover revenue; introducing a strategic framework to support more efficient, cost-effective and transparent procurement efforts, particularly in the health sector; and developing a framework that that will include financial recovery plans to address non-performing departments.

In a nutshell, public resources could not be substantially expanded without faster economic growth and job creation. Over the period ahead, government was focusing on reforms that support growth, stabilise state institutions, and improve service delivery. In-year growth outlook had been revised down sharply, and revenue shortfalls for 2018/19 —2020/21 remained significant. Despite spending pressures materialising, the expenditure ceiling remained intact as the anchor of fiscal policy. Real non-interest spending grows by 1.9 per cent per annum prioritising education, social welfare, and health. The weaker growth outlook, medium-term revenue shortfalls, and weaker rand result in debt stabilising at 59.6 per cent of GDP in 2023/24. Key fiscal risks in the period ahead include weak economic growth, uncertainty in the revenue outlook and the poor financial position of state-owned companies.

Discussion

Mr De Beer appreciated the presentation as well as the Minister’s brutal honesty regarding the state of the economy. He sought clarity about actions being taken to re-capacitate SARS. He noted that the MTBPS outlines that SARS, among other programmes and entities, would be recapitalised.

Ms T Tobias (ANC) said government’s plans and initiatives should be in alignment with the National Development Plan (NDP). She pointed out that there has not been much alignment between the expenditure patterns of departments and the NDP thus far. She hoped Treasury would intervene and turn things around as misalignment was a feature in most departments. Prioritisation and monitoring would be crucial for the President’s stimulus package, and there had to be discussions on how this should be done.

Mr W Wessels (FF+) said having the Minister admitting to the problems facing the country was positive as ignoring them would not solve anything.  He noted the overestimation of growth projections which has been happening for a long time. He asked if there were any plans to address this. He asked how non-performing ministries and municipalities would be dealt with without impacting the people negatively. Withholding funding from these delinquent municipalities would only hurt communities. He added that having this many municipalities owing Eskom was a crisis on its own. This Eskom debt problem was a vicious cycle contributing to the twin deficit.  How was the R30 billion wage bill shortfall going to be dealt with? There had to be a clear plan which will not impact service delivery negatively.

Mr A Shaik Emam (NFP) said the country should focus on producing high quality graduates that speak to the needs of the economy. Corruption is a scourge and there appears to be political interference in all spheres of government and no real separation of powers. Corruption is underestimated whilst it happens even before tenders go out, and billions were being lost. He wanted to know whether additional money would be released to the Public Investment Corporation following the huge sums pumped to its Mozambique project.

Mr F Shivambu (EFF) said there must be a review of State functions. Government’s over-reliance on external service providers and sole focus on procurement should be looked into. What informs the supposition that an above 60% debt to GDP ratio would lead to IMF’s intervention? It appears some of the interventions being proposed were faith-based and without any scientific method to them. He asked for an assurance that as part of the interventions to stabilise the wage, retrenchment of public servants would not be the result. How was fee-free education going to be financed? Not much had been said in the MTBPS in this regard.

Mr S Swarts (ACDP) asked about the fiscal slippage witnessed in the medium term. To what degree were the proposals set out in MTBPS going to be fruitful? He asked whether the Nugent Commission revelations had impacted on tax morality and tax collection. Government needs to take urgent steps to deal with corruption, particularly at SOEs. There was prima facie evidence of wrongdoing thus the need for urgent action and progressive interventions. Why were stolen funds not being recouped?

Mr F Essack (DA) noted serious challenges in the public sector and pointed out that the Public Audit Bill had been recently passed. This Bill had to be utilised effectively. He asked whether the Minister of Finance was serious about dealing with maladministration especially in provinces and local government.

Mr M Monakedi (ANC) asked what the plans were to bring the wage bill down.

Mr A Lees (DA) asked for an indication whether the Minister supports privatisation or part privatisation in the context of SOEs. Was this what the Minister meant by reconfiguration of SOEs? There is a huge amount of consternation about the VAT increase that was going to bring in R22 billion. However, reports suggest that- of the expected R22 billion - R11 billion would go to the payment of VAT refund backlogs and R9 billion will be used for refund catch-ups in the current year. Supposedly only R2 billion would be available for current expenditure. Additional items had also been zero-rated such that expected revenue would further reduce by R1.7 billion. Therefore, was it correct to conclude that the VAT increase had led to zero contribution towards normal funding of government? The VAT increase would have no contribution to current expenditure. The VAT refunds backlogs had led to many businesses going under and had cost the country many jobs. Who was going to be held accountable for this?

Mr D Maynier (DA) agreed that the country was at crossroads as pointed out by the Minister during his speech. The markets need some clarification about the Minister’s positions given the sentiments he had expressed on his Twitter account. He referred to a tweet in which the Minister had expressed his belief that 40% of the mining sector should be state-owned, and that there should be a sovereign wealth fund despite the country’s low savings rate. Where exactly does the Minister stand? Where does the Minister stand on prescribed assets if indeed the country finds itself in a debt trap? At what level does national debt become sustainable? At 60% of GDP? Was Treasury going to support the imposition of a debt ceiling as proposed by the DA? What was Treasury’s projection of total public sector debt in the medium term?

Ms G Ngwenya (DA) asked about the nuclear new build programme. Was government going forward with this? The continued fragility of SOEs was concerning. Mindful of this, she asked the Minister to restate his views on nationalisation of the Reserve Bank. If the Minister was supportive of this proposal, where does his confidence in SA’s institutional resilience come from? Poor South Africans had been squeezed quite terribly by the road accident fund. How will a fuel levy increase further impact the poor?

Mr N Nhleko (ANC) observed that Treasury was on one side and Parliament on the other. This was an undesirable situation under the prevailing circumstances. He suggested that there be dedicated sessions to discuss issues around oversight, accountability and projects management. Members were sitting on one side throwing questions at Treasury while in actual fact Parliament has got to provide the answers.

A DA Member asked about plans to reduce the wage bill. What were the detailed plans to reduce government debt? He wanted to know whether the Boarder Management Authority does exist already. If it is still yet to be established, how much was it going to cost?

Ms S Shope-Sithole (ANC) said the economic situation the country was grappling with should largely be blamed on Parliament and Treasury for failing to carry out their oversight and systems management mandate effectively. The Executive and the Legislature should exercise their roles fully. 

Ms Phosa welcomed the proposed infrastructure fund. Parliament would have to strengthen oversight over the infrastructure budget, and the infrastructural development master-plan be followed up to ensure progress. She wanted to know about the timelines to deal with the Giyani “cesspool of corruption” as identified by the Minister during his speech.

Mr Carrim welcomed the candour and head-on confrontation of the challenges. The Minister will be held accountable in this regard. He welcomed the addition of items to the VAT zero-rated list. What other targeted interventions will be brought forth to cushion particularly the poor? He asked how the R24.7bn revenue shortfall came about- given that SARS is monitored per quarter. It appears SARS was possibly "misleading" Parliament. If this was the case then the matter would be referred to the Speaker’s Office. Was Parliament exercising its oversight effectively? He understood the Minister could not possibly be in a position to respond to all questions orally. He directed Treasury to furnish the Joint Committees with written responses within seven days. 

Minister Mboweni said Members had raised important issues. Some were ideological in nature and could be debated outside a formal meeting, whereas some of the issues raised could be best answered by the Presidency as well as relevant government departments. He questioned whether the country really needs a national carrier like SAA? The working class do not use it so why not focus on taxis and trains that work? Swissair closed down because it was badly run and a new swiftly-run airline emerged. He was not saying SAA must be closed down now but it was just a thought. It should be explored how SAA could possibly be reconfigured. Complex problems could not be solved by lowest common multiplier solutions.

A Treasury official said the Border Management Agency was yet to be established, and the applicable Bill was still with Parliament. Various functions within government will be consolidated as part of its operationalization. 

Mr Mark Kingon, Acting Commissioner, SARS, replied that while he is at SARS he will try to fix things. Among the pressing issues to be addressed include stability of leadership and staff morale. Leadership stability was urgently required at SARS. A successful SARS was a fundamental building block for the country. Staff morale was understandably very low at this time. Close to 200 people were affected by moves in terms of the new operating model. As an example, he had an advocate which had not been applying his skills sets to tax matters - which comes back to addressing tax avoidance and illicit financial flows. The key issues were flowing out of the Nugent Commission of Inquiry, which is ongoing, and the Davis Tax Committee, which addresses governance. At the core, the failure of an organisation is the failure to deal with proper governance. This had to be fixed- SARS could not land in that boat again. Another issue to be addressed was taxpayer trust and tax morality. There has been a slippage in tax compliance. There were a growing number of people not submitting returns. This could not be allowed to continue. Taxpayer behaviour needs to be addressed. A fundamental building block is service, linked to VAT refunds. He aimed to have VAT refunds paid out at a monthly rate, and gave assurance that SARS wanted to "clean" up this situation, as this would release monies back into the economy. The last two issues raised were system modernisation - which, according to evidence submitted to the Nugent inquiry, has been stalled - and proper skills development. SARS needs skilled people in the organisation to tackle tax fraud when it happens. These changes would not happen overnight. There are short-term, medium-term and long-term issues to deal with.

Mr Mogajane said having represented SA at the World Bank for a number of years; it was difficult for an African country to put forward a strong case for a loan from the IMF. These loans also have conditions attached. No one wants to be there- it was something to avoid at all costs. SA cannot continue to irresponsibly manage finances, but there is still room to make adjustments by taking advantage of "low hanging fruit" in order to "get to the other side". If SA does not do anything about the low growth, now revised down to 0.7%, it will be difficult for SA to sustain itself. If investment and confidence rises, then SA could reach higher growth of 2.3% by 2021. Even this is not what it should be, it would be ideal to be growing at levels of 5.6% or even more. Treasury will continue playing its oversight role regardless of having own challenges as a department. Engagements with rating agencies were on an ongoing basis.

Mr Mondli Gungubele, Deputy Minister of Finance, said the general agreement was that there had been weaknesses in systems of government. The current approach seeks to deal with the challenges, spearheaded by the Presidency. The oversight work of Treasury also needs to be fully capacitated. The Ministry was comfortable with the plans to deal with challenges at SARS as articulated by the Acting Commissioner.

Mr Carrim said the main takeaway was that Parliament had to be far more effective in its oversight. It was no use dumping it on the Executive. He thanked everyone for the engagements.

The meeting was adjourned. 

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