2018 MTBPS: National Treasury response to submissions

Meeting report

National Treasury presentation
Mr Ismail Momoniat, DDG: Tax and Financial Sector Policy, National Treasury, took the Committees through Treasury’s responses to the public submissions on 2018 revised fiscal framework. South Africa’s main challenge is persistently low economic growth, and the underlying causes could not be fixed through the fiscal framework. What was required was implementation of growth reforms, together with efforts to improve services by strengthening governance, stamping out waste and corruption and turning around key state institutions. After years of fiscal consolidation, government was running out of space for additional tax increases, spending cuts and reprioritisation. Government had tried as far as possible to protect front-line services like health and education, and infrastructure budgets. Across-the-board cuts would likely harm front-line services. What was required are decisions to target areas of inefficiency. On the revenue side, under-collections have risen consistently, despite increases in PIT, VAT, ad valorem, fuel levy, dividends tax, and capital gains tax. In a period of low growth and rising administered prices, government would like to avoid putting additional downward pressure on the economy and household incomes. However, more fiscal measures may be required if progress is not made on the reform agenda. Protecting the expenditure ceiling will require SOC reform and wage bill interventions.

VAT zero-rating
Stakeholders welcomed the zero-rating of sanitary pads, cake flour and white bread flour, but more items should have been zero-rated and should have considered more targeted expenditure programmes, such as vouchers for school uniforms. The Independent Panel of Experts recommended that six items be considered for zero-rating. Given the large revenue shortfalls, and to keep the integrity of the VAT system intact, the MTBPS proposes that three of these six items are zero-rated from 1 April 2019. After five years of significant increases in other taxes and large revenue shortfalls, the VAT increase was necessary to ensure that our public finances are sustainable. Studies show that taken together with the zero-rated items VAT in SA is not regressive. However, it still increases the cost of living for even the poorest households. National Treasury was painfully aware of the impact of the VAT increase on poor households, and believes that more effective and targeted government expenditure programmes will be the best mitigating action that can be taken. Better monitoring and compliance expenditure mechanisms to get better targeting and effective spending on poor households were being considered. NGO input has been very insightful.

Illicit tobacco
A comment was received that the large increase in illicit tobacco over the last few years is reducing tax revenue and needs to be tackled. Excise duties on tobacco should not be increased until there is proper enforcement. It does appear that illicit tobacco had increased substantially over the past few years, coinciding with a material decrease in excise duties on tobacco. However, there has been no policy shift in tobacco taxation, where the targeted excise burden has remained at 40 per cent of the average weighted retail selling price over this period. Increase in illicit trade could not be due to step shift upwards in excise duties on tobacco. Given the sharp increase in illicit trade, and the interim findings from the Nugent Commission, it appears that a drop in enforcement capacity has contributed to the increase in illicit tobacco. It was unlikely that reducing the targeted excise tax burden on tobacco will reduce illicit trade. Improvements in enforcement will be the key strategy to reducing illicit tobacco and improving excise duty revenue.

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, stabilising state institutions, and improving service delivery. In-year growth outlook had been revised down sharply, and revenue shortfalls for 2018/19 —2020/21 remains significant. Despite spending pressures materialising, the expenditure ceiling remains 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
Ms T Tobias (ANC) appreciated the comprehensive responses. She asked why the wage bill continues to grow without notable increases in productivity. She emphasised that stringent conditions should be put in place on targeted interventions to reduce misappropriations.

Mr D Maynier (DA) asked if there had been a change in outlook on SAA. Whereas government policy seems to be aimed at reconfiguring SOEs, the Minister seems to have a different view- that the airline should be shut down. Was government policy about reconfiguring or shutting the airline down?  At what point is the debt to GDP ratio sub-optimal in Treasury’s view? At what point does the country enter into a debt trap? SOE debt was a major problem as a significant proportion of it is guaranteed by government and denominated in foreign currency. He asked if there was a deliberate attempt by SARS to withhold VAT refunds to balance their annual reports.

Mr O Terblanche (DA) asked about the impact of policy uncertainty on economic growth. A lot could be done to get around policy uncertainty. He was concerned about the year-in-year-out adjustments of growth forecasts. What could be done to ensure robust projections? Also, there were problems in the project management and planning space. Public funds were being thrown into a bottomless pit.

Mr M Monakedi (ANC) said Parliament would require further suggestions on how the wage bill could be contained. Was Treasury considering insourcing some of its expenditure items as a cost-cutting measure?

Ms P Nkonyeni (ANC) noted that some stakeholders felt the stimulus package was actually a reprioritisation program. She asked for Treasury’s view on this. She suggested the imposition of a wealth tax as a means of enhancing government revenue.

Mr De Beer asked about the status of the SARS rebuilding programme as articulated by the Acting Commissioner recently.

Mr Carrim said the difficulties at SARS were well-understood. However, the Minister should have said something about illicit financial flows during his speech. How was it that Treasury was not aware of the huge amounts of money which were being withheld by SARS in the form of refunds? If the allegations were true and there had been deliberate misrepresentation, then action would have to be taken. On the additional items on the VAT zero-rated list, the Committee would want to hear more about what Treasury would do to cushion low-income earners from the VAT increase, within the expenditure ceiling. The majority in the Committee were excruciatingly aware of the need for revenue under a constraining economic environment. The dire economic environment further reinforces the need for more targeted expenditures to cushion the poor from the VAT increase. Treasury should target expenditures beyond sanitary pads. On SAA, until the Committees hear from the Minister, the majority was guided by the ANC position. He welcomed the dismissal of the SARS Commissioner. The President had no choice but to fire the Commissioner, given the preliminary recommendation of the Nugent commission of inquiry, that he do so. He invited inputs from stakeholders present.

Mr Matthew Parks, Parliamentary Coordinator, COSATU, welcomed the recent dismissal of the SARS Commissioner. He expressed COSATU’s disappointment in the MTBPS which had not brought forth any clear turnaround strategies. COSATU hoped for clear strategies on customs enforcement and turnaround of SOEs. The VAT concessions were appreciated but workers were not sure if the two were enough and pleaded with government to consider additional measures to cushion the poor. COSATU was willing to engage with government on how to cut costs and improve service delivery. The extent of the crisis in some departments as a result of the freezing of some public service posts was worrying. However, it was concerning that there were no efforts slash the obscene salaries received by some officials in SOEs.

Mr Matt Johnson, Parliamentary Liaison Manager, OUTA, expressed concern that Treasury was just answering questions instead of taking stakeholder comments into account. OUTA believed public participation in budgetary processes and policymaking was very important. He asked if Treasury agreed with sentiments expressed by stakeholders that insolvent SOEs should be partly or fully privatised. 

Mr Momoniat pointed out that the MTBPS deals with the macro and fiscal framework for the next year; specific expenditure proposals were not dealt with at this stage. A lot of the tax proposals would be taken as inputs for the February 2019 budget. Ultimately the budget is about trade-offs. The hard choices had to be made. The Minister made important comments on the need for a strong culture of compliance as well as consequence management for fruitless and wasteful expenditure and contravention of the Public Finance Management Act (PFMA). Also, the culture of non-payment and tax immorality has consequences for service delivery. On the challenges at SARS, Members should go through the Nugent Commission interim report; its findings were very disturbing. The organisation was systematically destroyed and taken backwards. It would be important for the Committee to call SARS to be taken through their customs modernisation plans.

Mr Ian Stuart, Acting DDG: Budget Office, National Treasury, added that the culture of payment for services needed to be inculcated as it impacts on service delivery. The cost of living adjustments as well as automatic cost pressures lead to wage bill growth. It was almost impossible to pinpoint the optimal debt levels. However, the country was not in a debt trap yet. Treasury was open to discussions as these were complex concepts and not very straightforward. The biggest risk on the fiscal framework was posed by SOEs, Eskom being the foremost. He gave assurances that comments from stakeholder were taken into account. Treasury did note all the divergent views expressed during hearings. 

Mr De Beer said the Public Audit Amendment Bill was to be signed by the President anytime now. The Bill will allow the Auditor-General to be more decisive in zooming into irregular and fruitless expenditure. The Committees were looking forward to its enactment. He thanked everyone and indicated the Committees would reconvene the following week to consider the Money Bill Report.

The meeting was adjourned.