2018 MTBPS: public hearings

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Finance Standing Committee

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

The Standing and Select Committees on Finance held public hearings on the 2018 Medium Term Budget Policy Statement (MTBPS). Congress of South African Trade Unions (COSATU), the Federation of Unions of South Africa (FEDUSA); the Organisation Undoing Tax Abuse (OUTA); the South African Constitutional Property Rights Foundation (SACPRIF); British American Tobacco South Africa (BATSA); the Alternative Information and Development Centre (AIDC); the Budget Justice Coalition (BCJ); and women pensioners from Pietermaritzburg gave submission.

COSATU said considering the fiscal, revenue, corruption and expenditure crises facing the nation, COSATU believed that the MTBPS was very underwhelming. The MTBPS did not go far enough given the extent of the many crises facing government, workers and the economy as a whole.  The reality is that South Africa is in an economic crisis and this current crisis can only be understood by looking at the root causes in a holistic way. The solution to the economic problems lies in bold measures of transformation, not in marginal programmes and projects. COSATU was deeply worried about the way forward after this placid policy statement at a time when a much bolder and decisive leadership was expected from government.  This represents another missed opportunity because what is contained in the statement was nothing new. On proposal to increase VAT, COSATU appreciated the inclusion of sanitary pads amongst the VAT exempt products. The inclusion of bread and cake flour was noted. COSATU welcomed the commitment to provide free sanitary pads at schools. However, COSATU was dismayed and angry that this is the sole extent of government’s assistance to the poor to cope with the VAT hike, other tax hikes, petrol price increases, declining public services, economic recession, thousands of layoffs, rising unemployment etc.  Government says it has no money yet it allowed billions upon billions to be looted and wasted. Now it simply dumps the bill upon the poor and workers and makes virtually no effort to recover the stolen loot. COSATU was compelled to reject government’s VAT concessions as simply inadequate. There is money within the budget that could be redirected towards directly helping the poor. Government’s response was simply underwhelming and inadequate.  

FEDUSA said workers should not be blamed for the economic woes. It is totally unfair to blame workers for South Africa's burden of the public sector wage which constitutes 35% of government expenditure. To allow employees to share in the growing prosperity, wages and salaries should increase at a rate equal to price inflation plus productivity growth. FEDUSA welcomed the announcement by the Minister of Finance that national and provincial departments would have to absorb the R30.2 billion budget overshoot following the conclusion of a three-year public sector wage agreement earlier this year within their R1.8 trillion compensation over the life of the agreement. FEDUSA welcomed the reprioritization of education through improving the quality of teaching in order to build scarce skills, transform our society through inclusive economic growth and create jobs on a massive scale in line with the objectives of National Development Plan. FEDUSA was pleased that the expansion of the healthcare services will result in the creation of 2 200 critical posts across the provinces and the success of the Clothing and Textile Competitiveness Programme which saw exports from the sector grow from R7.1 billion in 2008 to R25.1 billion in 2017 and the opening of 22 new leather factories. The wage bill, which accounts for 35% of government expenditure, was reasonable. Wage increases had been above inflation - a good thing, because inflation erodes income of workers, who also have to get to work by contending with high transport costs due to fuel price hikes. Wage increases cover inflation and productivity growth.

OUTA highlighted the problematic context of the 2018 MTBPS which include: eroded social contract between taxpayers and government; trust deficit; unbearable burden on taxpayers; exponential increase in cost of living; much lower economic growth than was projected, according to first quarter performance; and the compounded burden due to ever increasing debt servicing costs & unrealistic expenditure programmes. On taxation levels and revenue, an analysis conducted by OUTA showed that South Africa had already reached the point where further increases in taxation would be counterproductive in terms of actual revenue collection. At tax levels prevailing between 2014 and 2017, a one percent increase in taxation produced only 0.05% in additional real tax revenue. Also, the data shows that each percentile of increases in taxation historically correlates to an average decline in GDP of about 0.3%. According to calculations, the optimal level of taxation for South Africa should lie somewhere between 20% and 24% of economic output. This is at least 5% (and up to 9%) below the 28.9% level of the 2017/2018 fiscal. On expenditure reduction strategy, since revenue collection is critically constrained, a significant reduction in State expenditure is necessary. According to OUTA data, the reduction required in recurring current Government expenditures lie between R270 billion as a minimum and, ideally, R485 billion per annum. If drastic measures are not taken, government runs the risk of losing control over its finances in the next decade. This sentiment was evident in the Minister of Finance’s recent decision to let National and Provincial departments absorb the extra-budgetary expense (R30 Billion) of the Wage Bill.

SACPRIF said with few exceptions tax professionals and economists agree that the most certain and efficient way to create jobs, provide access to land and stimulate GDP growth (raising productivity and reducing the cost of doing business) is to substitute personal taxes on income taxes and vat with land rents, a rates and taxes user-charge. In fact, the Davis Tax Committee (DTC) agreed in principle with this in their April 2018 Wealth Tax Report. Therefore, by accepting the principle recommendations of the DTC, and rejecting their frankly cynical misgivings, the state could end the subsidy of vacant and unused land prices as section 25.51 and 22.92 of the Constitution stipulates. This would mean that South Africa becomes a tax haven with easily affordable land like the Eastern Tigers of Hong Kong, Singapore, Taiwan and South Korea. The problem with local and foreign direct investment then becomes not its scarcity but its abundance, and the nightmares of jobless, landless and low GDP growth will disappear.

BATSA, in submission, highlighted the impact of illicit trade on the excise revenue system. Tax receipts from local producers were declining owing to high price sensitivity of consumers and easy affordability and availability of illicit tobacco. Jobs and investment were under threat from illegal cigarettes. At risk were: 12 000 jobs sustained by tobacco value chain, with more than 30,000 dependents supported by tobacco jobs; 100% of local Leaf consumed by legal industry (90% by BATSA); 170 emerging tobacco farmers uplifted and employ seasonal staff from communities; R13.1 billion in taxes paid to SARS in 2017; USD $25 million invested in SADC region in capital expenditure; and 353HA under cultivation, with 133 rotated for food cultivation. Therefore, urgent action was needed to ensure that illicit trade is dealt with and outstanding taxes are collected.

The FCSG shared views on the public sector wage – and indicated that increases should be limited to inflation. Increases have been above inflation, but productivity levels of workers must catch up. Civil service remuneration increases, including promotions and bonuses, could not exceed the rate of inflation. It is necessary for the productivity in civil service to catch up with large adjustments given in the last ten years. SAA is a "vanity project" that the SA economy cannot afford and it should be sold. FCSG strongly believed SAA should be privatised. Plans by government to merge SAA and SA Express was a strange idea – as merging two "bankrupt" companies to make a success was unheard of. Taxpayers could no longer afford to finance the airline through bailouts from Treasury. SAA should have been given away five years ago when it still had value; in the meantime it has been a massive drain on the fiscus.

A forum of women pensioners who live in Pietermaritzburg, in submission, asked government to seriously consider providing all pensioners with a double Old-Age Grant in December. They asked that the R1 700 pension be doubled to R3 400 in December. Secondly, the level of the pension must be increased to that of a living wage. The R1 700 monthly pension was the only source of income coming into homes. December and January are very difficult months. With this pension the elderly must cover the usual expenses plus the extra expenses of school uniforms, shoes, stationery and extra food. This year has been very tough because everything has gone up in price and the monthly pensions cannot cover these price increases. Pensioners start out every year in terrible debt and this year was going to be much worse. Giving all pensioners a double-pension in December will help absorb some of the pressures faced by pensioners.

AIDC expressed concerns with regards to the 2018 MTBPS tabled by the Minister of Finance. The MTBPS highlighted the deep crisis facing the country including alarmingly high levels of unemployment, which ultimately puts South Africa at a crossroads or as it would be understood at the precipice of a crisis. Included in this crisis is a stagnating economy, declining investment in the real economy as well as weak levels of aggregate demand, this must all be put in the context of a global economy which is on the brink of recession. One would think that this would necessitates urgent action in order to address the countries growing socio-economic problems. Instead, the MTBPS indicates that government was willing to proceed with business as usual, including with the perpetuation of fiscal consolidation. The budget is a critical tool to map the path for economic development.

The BCJ said rather than taking bold steps to stimulate the economy and embark on a more inclusive growth path, the budget policy statement merely tinkers at the margins. While the statement’s focus on improving governance and strengthening institutions such as SARS was welcomed, it is the view of the BJC that an economic recovery and turnaround will come only from investment in all aspects of improving peoples’ lives. The anaemic social spending of recent years, and real per capita cutbacks taking place in some areas, will only further entrench patterns of poverty and inequality. The MTBPS reinforces South Africa’s austerity policy direction and does little to ensure government’s revenue-raising and spending advance the fulfilment of socio-economic rights. On overall expenditure and revenue, government needed to examine the proposed reprioritisations for areas where funding is being removed from programmes that are important, but are not delivering due to issues within departments. The Budget Justice Coalition would welcome a committee that focuses on pro-poor rights-based fiscal policy. The coalition also recommended that government: reverse the VAT increase and indicate when over the next three years this will be implemented; look into the option of borrowing at a below-market, but financially-sustainable, rate from the GEPF; and look into the utilisation of the Unemployment Insurance Fund (UIF) for a work-seekers grant for the unemployed.

Members asked stakeholders if they supported the special allocation of R5 billion to SAA. If not, what would the alternative be? They asked for comments on the upward bias in Treasury’s growth projections. Was this a deliberate manipulation of numbers, a capacity issue or a combination of both? The view of the Committee majority in relation to SAA was that there should be a public-private partnership that would involve the roping in of an equity partner. There is a developmental case for SAA and it was not true that Members only took pride in seeing the flag carrier in foreign airports.

The Joint Committees would reconvene to hear responses from Treasury after two days.

Meeting report

Congress of South African Trade Unions (COSATU) submission

Mr Matthew Parks, Parliamentary Coordinator, COSATU, said considering the fiscal, revenue, corruption and expenditure crises facing the nation, COSATU believed that the MTBPS was very underwhelming. The MTBPS did not go far enough given the extent of the many crises facing government, workers and the economy as a whole.  The reality is that South Africa is in an economic crisis and this current crisis can only be understood by looking at the root causes in a holistic way. The solution to the economic problems lies in bold measures of transformation, not in marginal programmes and projects. COSATU was deeply worried about the way forward after this placid policy statement at a time when a much bolder and decisive leadership was expected from government.  This represents another missed opportunity because what is contained in the statement was nothing new.

On proposal to increase VAT, COSATU appreciated the inclusion of sanitary pads amongst the VAT exempt products. The inclusion of bread and cake flour was noted. COSATU welcomed the commitment to provide free sanitary pads at schools. However, COSATU was dismayed and angry that this is the sole extent of government’s assistance to the poor to cope with the VAT hike, other tax hikes, petrol price increases, declining public services, economic recession, thousands of layoffs, rising unemployment etc.  Government says it has no money yet it allowed billions upon billions to be looted and wasted. Now it simply dumps the bill upon the poor and workers and makes virtually no effort to recover the stolen loot. COSATU was compelled to reject government’s VAT concessions as simply inadequate. There is money within the budget that could be redirected towards directly helping the poor. Government’s response was simply underwhelming and inadequate. COSATU believed and called upon Parliament and government to urgently amend the MTBPS to include all or the following VAT concessions: R500 locally produced school uniform vouchers for learners at no fee schools; increase the free electricity and/ or water allocation to indigent households; and/ or exempt locally produced poultry (whole or pieces) as a key food and nutritional item for poor and working.

COSATU believed that government can significantly increase revenue and thus provide more resources in support of economic stimulus, job creation and developmental objectives by: fast tracking the SARS Commission of Enquiry; fast tracking the engagement on and implementation of progressive tax proposals from the Judge Davis Tax Commission; cancelling the VAT tax hike to 15%; increasing company taxes to 30% or 32% which should generate an additional R13 to R26 billion in revenues; increasing the estate and inheritance taxes; cracking down on the massive rise in illicit tobacco sales and customs fraud, especially textile imports; increasing capital gains tax to 45% which should generate an additional R4 billion in revenue; increasing income tax for incomes above R1 million to 45% which should generate an additional R5 billion; and introduction of progressive tax system, with an introduction of a tax category for the super-rich.

Federation of Unions of South Africa (FEDUSA) submission

Dr Dennis George, General Secretary, FEDUSA, said workers should not be blamed for the economic woes. It is totally unfair to blame workers for South Africa's burden of the public sector wage which constitutes 35% of government expenditure. To allow employees to share in the growing prosperity, wages and salaries should increase at a rate equal to price inflation plus productivity growth. FEDUSA welcomed the announcement by the Minister of Finance that national and provincial departments would have to absorb the R30.2 billion budget overshoot following the conclusion of a three-year public sector wage agreement earlier this year within their R1.8 trillion compensation over the life of the agreement.

FEDUSA welcomed the reprioritization of education through improving the quality of teaching in order to build scarce skills, transform our society through inclusive economic growth and create jobs on a massive scale in line with the objectives of National Development Plan. FEDUSA was pleased that the expansion of the healthcare services will result in the creation of 2 200 critical posts across the provinces and the success of the Clothing and Textile Competitiveness Programme which saw exports from the sector grow from R7.1 billion in 2008 to R25.1 billion in 2017 and the opening of 22 new leather factories. The wage bill, which accounts for 35% of government expenditure, was reasonable. Wage increases had been above inflation - a good thing, because inflation erodes income of workers, who also have to get to work by contending with high transport costs due to fuel price hikes. Wage increases cover inflation and productivity growth. He also presented data which showed that during the Zuma administration, since 2009, salaries for those earning more than R30 000 increased substantially up until 2017. FEDUSA attributes this to the deployment of "comrades". In contrast, salaries of those earning less than R20 000 remained consistent.

 

On restoring investor confidence, a string of unfavourable developments including low economic growth, forecast by the Reserve Bank, the International Monetary Fund and the World Bank to stabilise at less than 1% for 2018 and the sovereign downgrading to sub-investment grade credit rating have combined to drive up the cost of borrowing and debt servicing by 15% or R215 billion and gross government loan to R3.7 trillion. Corruption, inefficient State Owned Enterprises (SOEs) and too many ministers and deputy ministers for the size of the economy continue to be a severe drain on the fiscus. A bold and decisive confrontation of these problems would go a long way into restoring domestic and global investor confidence and the sovereign credit rating to investment grade.

Organisation Undoing Tax Abuse (OUTA) submission

Mr Matt Johnson, OUTA, highlighted the problematic context of the 2018 MTBPS which include: eroded social contract between taxpayers and government; trust deficit; unbearable burden on taxpayers; exponential increase in cost of living; much lower economic growth than was projected, according to first quarter performance; and the compounded burden due to ever increasing debt servicing costs & unrealistic expenditure programmes

On taxation levels and revenue, an analysis conducted by OUTA showed that South Africa had already reached the point where further increases in taxation would be counterproductive in terms of actual revenue collection. At tax levels prevailing between 2014 and 2017, a one percent increase in taxation produced only 0.05% in additional real tax revenue. Also, the data shows that each percentile of increases in taxation historically correlates to an average decline in GDP of about 0.3%. According to calculations, the optimal level of taxation for South Africa should lie somewhere between 20% and 24% of economic output. This is at least 5% (and up to 9%) below the 28.9% level of the 2017/2018 fiscal.

On expenditure reduction strategy, since revenue collection is critically constrained, a significant reduction in State expenditure is necessary. According to OUTA data, the reduction required in recurring current Government expenditures lie between R270 billion as a minimum and, ideally, R485 billion per annum. If drastic measures are not taken, government runs the risk of losing control over its finances in the next decade. This sentiment was evident in the Minister of Finance’s recent decision to let National and Provincial departments absorb the extra-budgetary expense (R30 Billion) of the Wage Bill. All cost reduction strategies are based on two main principles: allocative efficiency (elimination of activities that are unnecessary); and productive efficiency (reduction in the resources needed to achieve essential outputs). In terms of allocative efficiency, the main recommendations would speak to potential activities and/or entities that can be eliminated entirely, sold to the private sector, or operationally restructured. In terms of productive efficiency, this time of financial strain in the public sector should be used to deal with serious governance issues in all organs of state. Examples range from procurement fraud and financial incompetence of municipal managers to poor service delivery resulting from a mismanaged or undermanaged (and thus underperforming) workforce. OUTA strongly supported the revitalized power and responsibility of AGSA to tackle fruitless, wasteful and irregular expenditure.

Therefore, OUTA recommended as follows:

  • Remove deeply insolvent state-owned enterprises from Government ownership and/or the consolidate entities / departments with overlapping functions
  • Phase out all Government agencies (central, regional and local) that do not confer a useful, direct and immediate benefit on the public at large
  • Wind-up Government departments (and activities within Government departments) that provide little or no benefit to the public at large (or, in fact, constitute obstacles to economic growth)
  • Further strengthen accountability mechanisms and enforce sound management practices & human resource efficiency in all organs of state
  • Eliminate residual corrupt networks in the public service that threaten the economic sovereignty of South Africa

In a nutshell, financial mismanagement, corruption and general maladministration has exacerbated the scarcity of funds available to government for the performance of its essential functions. The social contract between taxpayers and government has been eroded – self-correction in the public sector is needed to remedy this.

Increasing taxation will not yield adequate increases in revenue or improved economic growth; so, wasteful and superfluous expenditure must be eradicated immediately. South Africa is on a precipice, and now is the time to take difficult decisions that will preserve our economic sovereignty and sustainability.

South African Constitutional Property Rights Foundation (SACPRIF) submission

Mr Peter Meakin, SACPRIF, said with few exceptions tax professionals and economists agree that the most certain and efficient way to create jobs, provide access to land and stimulate GDP growth (raising productivity and reducing the cost of doing business) is to substitute personal taxes on income taxes and vat with land rents, a rates and taxes user-charge. In fact, the Davis Tax Committee (DTC) agreed in principle with this in their April 2018 Wealth Tax Report. However, the DTC was drawn from professionals and academics whose livelihoods will be threatened if taxes were directed at where land is situated, not what people do on it. Therefore, by accepting the principle recommendations of the DTC, and rejecting their frankly cynical misgivings, the state could end the subsidy of vacant and unused land prices as section 25.51 and 22.92 of the Constitution stipulates. This would mean that South Africa becomes a tax haven with easily affordable land like the Eastern Tigers of Hong Kong, Singapore, Taiwan and South Korea. The problem with local and foreign direct investment then becomes not its scarcity but its abundance. And the nightmares of jobless, landless and low GDP growth will disappear.

Mr Meakin outlined how to reduce VAT by 50% to R174 billion (2018) by cancelling the state subsidy of land prices. The way to go here was for President Ramaphosa to announce this reduction, by decree if needs be, but insisting that Municipalities recover the R174 billion by applying a rates and taxes penalty of 10 times on all vacant/unused land. This provision is not an amendment to the cents-in-the-rand rates policy as section 5 of Municipal Property Rates Act 6 of 2004, but it is required to eliminate the illegal state subsidy of land prices which unreasonably prejudices national economic policies of job creation, land access and GDP growth. If owners do not pay the penalty, the state expropriates the vacant property at the nil value which unsubsidised land attracts, then leases it out at market rents under perpetual tenures and with market rent reviews.

Discussion

Mr A Lees (DA) asked COSATU and FEDUSA if they supported the special allocation of R5 billion to SAA. If not, what would the alternative be? He asked what OUTA believed should happen to SAA. Was the organisation in support of the R5.7 billion transfer from PRASA to subsidise the Gauteng freeway improvements; the E-tolls?

Ms N Ntantiso (ANC) asked COSATU and FEDUSA about what should be done to avert a situation whereby IMF intervention is warranted. She asked SACPRIF how privatised land would be taxed in its tax model.

Ms P Nkonyeni (ANC) appreciated the submissions. Was it not correct to say government was already making efforts to address most of the issues raised by stakeholders? This was with reference to the stimulus package, the jobs and investment summit among other interventions. Government was doing its best to put people first. She asked OUTA about the benefits of privatising SOEs. Why should government take such a route?

Mr D Maynier (DA) asked the unions if they agreed that the bargaining mechanism was faulty. He pointed out that provincial governments now had to absorb the public sector wage agreement which they were not party to. This now came in as an unfunded mandate. Why should provincial governments implement the wage agreement and absorb the costs? Would the trade unions accept responsibility for lack of service delivery in the provinces ultimately? It was in fact trade unions that were taking monies from the poor.

Mr O Terblanche (DA) asked if it was a correct assessment that the unions were not in support of the MTBPS.

Mr M Monakedi (ANC) welcomed COSATU’s call and support for government’s efforts to fight corruption.

Mr Parks, in response, recognised the fiscal crisis and said 100% of government expenditure could not go towards the wage bill, saying the current level of 35% was "fine and stable". Costs can be reduced by addressing management at state-owned enterprises, slashing the executive bill, as well as perks for politicians. Wastage could be reduced in procurement processes by state entities. If supply chain management processes by both local government and state-owned enterprises were investigated, then "a lot of dead bodies" would be found. He raised concerns about jobs in the public sector – given news that the SABC would be embarking on retrenchments. This is opposite to President Cyril Ramaphosa's agreement at the jobs summit that no jobs would be shed in the public sector. The situation at SAA has resulted from corruption and looting and wasteful expenditure which must be dealt with. It is not the stewardesses who looted, it is management and their friends. He further called for detailed and clearer turnaround plans for troubled SOEs. The corruption of the past must also be dealt with and stolen money should be recovered. COSATU wanted to see those people who looted, sitting in Pollsmoor (prison) in orange overalls. He also issued a warning against approaching the IMF. We see what happened to Greece and Ireland- if the IMF could molest Greece and Ireland, who are we as SA to survive them? The conditions attached to the IMF's loans to the two countries left them in an economic depression.

Dr George, in response, pointed out that SAA has been issued a R19.1 billion government guarantee, of which R14.5 billion has been used. If SAA defaults on its loans, the liability will fall on the fiscus, which will impact the sovereign credit rating and lead to a downgrade. For this reason, FEDUSA supported the R5 billion extended to the airline by government to repay debt. SA should not borrow from the IMF as there will be no coming back for the SA economy if a loan is sought from the IMF to finance debt obligations. Their conditions will kill the country. SA will lose its sovereignty and the IMF could deploy its own people to Treasury. It will be far worse than what the Guptas did to the country. FEDUSA was essentially rejecting the virement to E-Tolls as it was irresponsible.

Mr Johnson said extreme mismanagement at SAA meant that it was almost beyond repair- no longer an asset but an irreversible liability. Instead of injecting more money, privatisation would be a better option for government. SAA is one of the worst examples of dysfunctional SOEs. Despite the new management, new leadership, too much damage has been done.

British American Tobacco South Africa (BATSA) submission

Mr Lindsay Martin, Manager, BATSA, in submission, highlighted the impact of illicit trade on the excise revenue system. Tax receipts from local producers were declining owing to high price sensitivity of consumers and easy affordability and availability of illicit tobacco. Jobs and investment were under threat from illegal cigarettes. At risk were: 12 000 jobs sustained by tobacco value chain, with more than 30,000 dependents supported by tobacco jobs; 100% of local Leaf consumed by legal industry (90% by BATSA); 170 emerging tobacco farmers uplifted and employ seasonal staff from communities; R13.1 billion in taxes paid to SARS in 2017; USD $25 million invested in SADC region in capital expenditure; and 353HA under cultivation, with 133 rotated for food cultivation. Therefore, urgent action was needed to ensure that illicit trade is dealt with and outstanding taxes are collected. Short term solutions which could be effected quickly would be as follows: monitoring production by place customs officials in all cigarette manufacturing plants; ban on sales below the level of tax owed / MCT (Minimum Collectable Tax); and no excise increases to prevent further revenue loss until tax compliance enforcement is in place and working. Longer term solutions could include the replacement of the current SA diamond stamp with an electronic fiscal marker.

Fiscal Cliff Study Group (FCSG) submission

Prof Jannie Roussow, Co-founder, FCSG, shared views on the public sector wage – and indicated that increases should be limited to inflation. Increases have been above inflation, but productivity levels of workers must catch up. Civil service remuneration increases, including promotions and bonuses, could not exceed the rate of inflation. It is necessary for the productivity in civil service to catch up with large adjustments given in the last ten years. SAA is a "vanity project" that the SA economy cannot afford and it should be sold. He strongly believed SAA should be privatised. "Give it away, it will not fly. Park the planes and wash them. We are tired of a vanity project. Politicians say they are proud to see SAA airplanes at international airports – park the things there and wash them. It's cheaper than to try and fly them." He added that plans by government to merge SAA and SA Express was a strange idea – as he had never heard of two "bankrupt" companies merging to make a success. He stressed that taxpayers could no longer afford to finance the airline through bailouts from Treasury. SAA should have been given away five years ago when it still had value; in the meantime it has been a massive drain on the fiscus.

The FCSG was asked to assess the accuracy of economic growth forecasts of the National Treasury during its appearance before Committees in February. The history shows an upwards bias projection which contributed to the current fiscal crisis: Expenditure was based on too high economic growth projections, and Treasury admitted its mistakes. South Africa needs more realistic forecasts from the National Treasury. The fiscal cliff barometer indicates that the fiscal cliff is closer than before after the 2018 main budget. There is noticeable deterioration (upwards movement/”kink”) after the latest economic and 2018 MTBPS data were included in the analysis. The fiscal cliff precipice moved forwards by almost a decade based on 2018 MTBPS analysis; now back to 2016 estimates, and even more data must be published on drivers of civil service remuneration, particularly the impact of: new government departments; notch increases; and performance bonuses. Going forward, total annual increases in civil service adjustments (including notch increases or anything else) cannot exceed the rate of inflation. South Africa needs more realistic forecasts from the National Treasury.

Submission by pensioners from Pietermaritzburg

A forum of women pensioners who live in Pietermaritzburg, in submission, asked government to seriously consider providing all pensioners with a double Old-Age Grant in December. They asked that the R1 700 pension be doubled to R3 400 in December. Secondly, the level of the pension must be increased to that of a living wage. The R1 700 monthly pension was the only source of income coming into homes. December and January are very difficult months. With this pension the elderly must cover the usual expenses plus the extra expenses of school uniforms, shoes, stationery and extra food. This year has been very tough because everything has gone up in price and the monthly pensions cannot cover these price increases. Pensioners start out every year in terrible debt and this year was going to be much worse. Giving all pensioners a double-pension in December will help absorb some of the pressures faced by pensioners. The extra money will be used to buy school uniforms, shoes and stationery. The extra pension will also help to buy food. Food prices go up in December and pensioners also must buy more food during this time because their children spend more time at home during the holidays and we must feed them properly. lt also helps to keep children close to home and secure and make sure that they are healthy and in a much better position when school starts in the New Year.

Members responded to the women pensioners’ submission in IsiZulu 2:26:00 to 2:45:00.

Alternative Information and Development Centre (AIDC)

AIDC expressed concerns with regards to the 2018 MTBPS tabled by the Minister of Finance. The MTBPS highlighted the deep crisis facing the country including alarmingly high levels of unemployment, which ultimately puts South Africa at a crossroads or as it would be understood at the precipice of a crisis. Included in this crisis is a stagnating economy, declining investment in the real economy as well as weak levels of aggregate demand, this must all be put in the context of a global economy which is on the brink of recession. One would think that this would necessitates urgent action in order to address the countries growing socio-economic problems. Instead, the MTBPS indicates that government was willing to proceed with business as usual, including with the perpetuation of fiscal consolidation. The budget is a critical tool to map the path for economic development. In light in the aforementioned elements, AIDC called for the following demands to be incorporated in the 2018 MTBPS:

  • A massive employment scheme through a new industrial development path to implement a just transition towards a low carbon wage led economy needs to be urgently implemented, and the MTBPS must be the first step in spearheading such change
  • In order to raise public resources and more broadly to strengthen the economy and increase workers’ wages, the fight against illicit financial flows must become a national priority, and tax authorities and the Treasury must publicly account on their progresses consistently in the future. This MTBPS is the occasion to start such accountability process in order to ensure progresses are registered in the near future to the benefit of all South Africans.
  • The South African government must reform the functioning of the Government Employees Pension Fund (GEPF) and the Public Investment Corporation (PIC) in order to reduce the overall debt repayment obligations that currently weaken the national budget unnecessarily. The current ideological management of the debt must be reformed in order to fund crucial budget expenditure programmes.

Budget Justice Coalition (BJC) submission

Mr Neil Coleman, Co-Director, Institute for Economic Justice, in his opening remarks, pleaded with the Committees to allocate more time to stakeholder submissions as their inputs could not be fully traversed within 15 minutes. On the MTBPS, rather than taking bold steps to stimulate the economy and embark on a more inclusive growth path, the budget policy statement merely tinkers at the margins. While the statement’s focus on improving governance and strengthening institutions such as SARS was welcomed, it is the view of the BJC that an economic recovery and turnaround will come only from investment in all aspects of improving peoples’ lives. The anaemic social spending of recent years, and real per capita cutbacks taking place in some areas, will only further entrench patterns of poverty and inequality. The MTBPS reinforces South Africa’s austerity policy direction and does little to ensure government’s revenue-raising and spending advance the fulfilment of socio-economic rights. Among other proposals, BJC made the following recommendations:

On overall expenditure and revenue, government needed to examine the proposed reprioritisations for areas where funding is being removed from programmes that are important, but are not delivering due to issues within departments. The Budget Justice Coalition would welcome a committee that focuses on pro-poor rights-based fiscal policy. The coalition also recommended that government: reverse the VAT increase and indicate when over the next three years this will be implemented; look into the option of borrowing at a below-market, but financially-sustainable, rate from the GEPF; look into the utilisation of the Unemployment Insurance Fund (UIF) for a work-seekers grant for the unemployed; request Treasury to seriously look at proposals to increase progressive forms of taxation, such as the detailed proposals previously put forward by the BJC, and proposals for implementing a wealth tax, including those contained in the Davis Tax Committee’s report; intensify efforts to combat illicit financial flows and tax avoidance with a view to raising national revenues and increasing reliance on domestic resources, including by combating trade mispricing within multinational corporations, and seeking international cooperation with relevant international organisations, and countries of origin for multinational corporations.

With a view towards potentially increasing the fiscal envelope, government should provide an urgent update on the implementation of all recent commitments relating to mitigating the impact of illicit financial flows, including: the coordination of a 2018 national risk assessment; the 2018 commissioned study to identify gaps between the capital flows and anti-money laundering frameworks; the introduction of a requirement that state-owned companies must obtain prior written consent from the National Treasury on certain categories of cross-border transactions; participation in the multi-agency workgroup to target illicit financial flows; the increasing of capacity to detect, analyse, investigate and report suspicious cross-border transactions; and the awareness campaign involving authorised dealers to promote the early detection and reporting of suspicious cross-border transactions or activities.

On macroeconomic policy, in light of the well-documented fact that austerity measures do not work, the South African Government needs to urgently enter into a dialogue about more creative economic alternatives. Fiscal policy needs to be strongly counter cyclical and policies such as inflation targeting, which exacerbate risks to the economy, should not be prioritised. South Africa’s monetary policy should target employment creation and growth. As a means of dealing with fiscal risks, government should continue to prioritise the urgent addressing of governance issues at State Owned Entities which are exposing the fiscus to risk through contingent liabilities. Also, the reasons for the decreasing of the Asset and Liabilities Management Unit at National Treasury’s programme management spending should be looked into.

Discussion 

Ms T Tobias (ANC) deplored the way researchers and experts contradict each other. She asked BAT how declared sales are measured in an environment where there is a high rate of tax avoidance. There had to be an explanation as to how BAT came up with this measurement.

Mr Maynier asked for the FCSG’s comments on the upward bias in Treasury’s growth projections. Was this a deliberate manipulation of numbers, a capacity issue or a combination of both?

Mr Martin said the record of declared sales of cigarette products was captured by SARS. The BAT submission sought to point out the trend that shows a decline in taxable sales of legal cigarette products.

Prof Roussow believed the overestimation of economic growth forecasts was due to a lack of capacity at Treasury. South Africa is closer to reaching the fiscal cliff – partly due to Treasury's overstated growth projections. When Treasury overstated growth projections, it means that tax revenue projections is also overstated and by so doing influences government expenditure which will be far greater than it should be. Treasury's forecasts make weather forecasts look good. It is necessary for Treasury to restore the integrity of its forecasts because it is getting this country into fiscal trouble. He implored that government do the right thing to avert a fiscal cliff, if not then government will be forced to approach the IMF. The IMF will not recommend anything else besides what the Fiscal Cliff Study Group and other [research] groups have recommended – to stay away from the fiscal cliff.

Mr Coleman said revenue shortfalls, the crisis at SARS as well as a stagnant economy were a reality. Therefore, taking the BCJ’s recommendations on exploring other revenue streams and economic alternatives would be helpful. The real issue was the preparedness to consider alternatives. Also, on the proposal to increase VAT, the Committees’ failure to take the expert panel recommendations on board was disappointing.

Mr Carrim said the view of the Committee majority in relation to SAA was that there should be a public-private partnership that would involve the roping in of an equity partner. There is a developmental case for SAA and it was not true that Members only took pride in seeing the flag carrier in foreign airports- that was probably a fictitious remark.

Mr De Beer said decisive action will have to be taken in relation to SAA. He appreciated the submissions and inputs, and indicated the Joint Committees would reconvene to hear responses from Treasury after two days. Stakeholders were welcome. 

The meeting was adjourned.  

 

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