Pre-Budget 2019: Parliamentary Budget Office briefing

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Finance Standing Committee

19 February 2019
Chairperson: Ms Y Phosa and Mr C De Beer (ANC; Northern Cape)
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Meeting Summary

2018 MTBPS

The Finance and Appropriations Committees met with jointly with the Parliamentary Budget Office (PBO) for a pre-Budget briefing.

The PBO pointed out that during the State of the Nation Address; the President highlighted the strategic direction for the budget in terms of linking priorities for 2019/20 with the National Development Plan. These include significant steps to be taken towards universal access to quality health care so as to improve the conditions of life for all South Africans, especially the poor. To accelerate inclusive economic growth and create jobs, R100 billion was committed by government into the infrastructure fund over a 10-year period. Further, to give young people a head start, government proposed a 10 years’ extension of the Employment Tax Incentive to draw young people in far greater numbers into labour market. The expectation was that Treasury would revise down the economic growth outlook for the year, in line with downward revisions of the global economy. Over the past six years, since the National Development Plan was launched, growth has been significantly lower than the 5.4% target, averaging below 2%. This has had implications on the ability of the country to meet socio-economic objectives. The poor state of the economy will be reflected in poor tax revenue collection. The mini-budget downwardly revised the National Budget estimates of a shortfall by R22.8 billion, and the PBO estimates a further R19.5 billion shortfall, relative to Treasury's estimates in the 2018/19 mini budget. The shortfall was mainly due to a shortfall in revenue collections from corporate income tax (CIT), personal income tax (PIT) and VAT refunds. The shortfall in CIT is mainly driven by the weaker economic environment and lower profitability, while the shortfall in PIT is related to slow employment growth and slow remuneration growth. The country’s growth potential – that is the economic growth the country can achieve if its current factors of production are employed efficiently – is low relative to other countries. More concerning was that it has been declining. The country’s economic growth has been poor, even relative to its low and declining economic growth potential. Arresting the downward trajectory of growth potential and actual economic growth require policies that promote and attract private and public investment, the utilisation of underutilised capital and labour.

Members commented on the macroeconomic outlook, specifically the low economic growth projections. They noted that the outlook did not look rosy at all. The country was confronting challenges which needed robust remedial action. They asked for views on the sustainability of the current macroeconomic trajectory particularly amidst an increasing debt burden, rampant corruption and increased government expenditure. There was need for the modelling of the various macroeconomic indicators on a regular basis to inform policy. This would enable all stakeholders to argue from informed positions. The reality was the country is in a highly constrained fiscal position and the question was what should be done to take South Africa forward.

Meeting report

Mr De Beer welcomed everyone to the pre-Budget briefing by the Parliament Budget Office (PBO). During the State of the Nation Address (SONA), the President made reference to the following urgent tasks; accelerating economic growth and job creation; improving the education system and developing critical skills; improving the conditions of life for all South Africans; stepping up the fight against corruption and strengthening the capacity of the State to address the people’s needs. That was the framework given by the President which the Budget presentation was expected to speak to. He invited the PBO’s presentation.

PBO presentation
Ms Nelia Orlandi, Deputy Director: Public Policy, said the PBO presentation aimed to stimulate discussion on: the strategic direction for budget allocations; the performance on national priority outcomes; and possible revisions by government to assist Members with their oversight role.

During the State of the Nation Address, the President highlighted the strategic direction for the budget in terms of linking priorities for 2019/20 with the National Development Plan. These include significant steps to be taken towards universal access to quality health care so as to improve the conditions of life for all South Africans, especially the poor. To accelerate inclusive economic growth and create jobs, R100 billion was committed by government into the infrastructure fund over a 10-year period. Further, to give young people a head start, government proposed a 10 years’ extension of the Employment Tax Incentive to draw young people in far greater numbers into labour market. Also, work experience was no longer a requirement at entry-level in state institutions.

In reviewing the 2014-2019 Medium Term Strategic Framework (MTSF) in terms of NDP implementation, the PBO analysis found that:

  • 70 % of the targets set for 2017/18 were achieved
  • 72.5 %of the indicators have baselines
  • 66.4 %of targets set in 2017/18 are measurable
  • Reports on 83 %of the targets were received
  • 19.4 %of indicators are linked to a specific process or system to collect performance information. All other data are gathered from standard administrative data
  • 86.8 %of MTSF indicators are appropriate (for the national level) or reliable to measure performance on the sub-outcomes
  •  36 %of MTSF performance indicators were incorporated into Annual Performance Plans of relevant departments

Mr Rashaad Amra, Economic Analyst, PBO, stated that Treasury would revise down the economic growth outlook for the year, in line with downward revisions of the global economy. He highlighted that over the past six years since the National Development Plan was launched, growth has been significantly lower than the 5.4% target, averaging below 2%. This has had implications on the ability of the country to meet socio-economic objectives. The poor state of the economy will be reflected in poor tax revenue collection. The mini-budget downwardly revised the National Budget estimates of a shortfall by R22.8 billion, and the PBO estimates a further R19.5 billion shortfall, relative to Treasury's estimates in the 2018/19 mini budget. The shortfall was mainly due to a shortfall in revenue collections from corporate income tax (CIT), personal income tax (PIT) and VAT refunds. The shortfall in CIT is mainly driven by the weaker economic environment and lower profitability, while the shortfall in PIT is related to slow employment growth and slow remuneration growth.

Growth potential
The country’s growth potential – that is the economic growth the country can achieve if its current factors of production are employed efficiently – is low relative to other countries. More concerning was that it has been declining. The country’s economic growth has been poor, even relative to its low and declining economic growth potential. Arresting the downward trajectory of growth potential and actual economic growth require policies that promote and attract private and public investment, the utilisation of underutilised capital and labour.

Economic outlook
Compared to last year the outlook for the world economy over the medium term has worsened. The world economy and emerging market and developing economies are expected to growth slower than forecasted 7 months ago. Similarly, estimates of global trade have also been downwardly revised over the medium term. The outlook for the South African economy has also been revised slightly downwards since the 2018 MTBPS by other agencies including the South African Reserve Bank.

Ms Gloria Mnguni, Public Finance Analyst, PBO, said marginal fiscal slippage was expected for 2018/19.
Government adjusted the 2018/19 main budget revenue by R22.8 billion from R1 321.1 billion to R1 298.3 billion during the adjustments budget process. The revised revenue estimate resulted in an estimated primary deficit of R34.1 billion. The Gross Tax Revenue shortfall for 2018/19 is R27.4 billion and the five largest tax instruments contributors are: value-added tax (VAT)             at 67.3%; corporate income tax (CIT) at 19.8%; personal income tax (CIT) at 5.4%; dividend withholding tax at 5.0%; and customs duties at 2.1%. The revenue collection shortfall was due to the technical recession experienced in the first half of the year and the once-off payments of overdue VAT refunds. Based on nine months of data, the PBO expects a higher main and consolidated budget deficit for 2018/9 compared to both Budget Review 2018 and MTBPS 2018 projections. This was primarily due to poor CIT and PIT receipts on a year-to-date basis. Over the first nine months of FY 2018/9, CIT receipts actually declined by 1.1% compared to the same period in 2017/18, reflecting weak corporate profitability. PIT receipts have grown by only 7.6% over the first 9 months of 2018/19, compared to the 5 year average of 10%. This reflects weak formal employment growth and remuneration per worker across the public and the private sector. Over the first nine months of FY 2018/19, VAT grew by 10.3% compared to the same period in the previous year. This is largely due to the 1 percentage point increase in the VAT rate.  VAT increase. Over the first 8 months of the financial year retail sales have only grown by less than 2% in real terms. Also over the first six months of the year real household final consumption, and government final consumption only grew by 1.3% compared to 2.1% for the same period over the previous year.

Ms Fatsani Banda, Economic Analyst, PBO, highlighted the state of South Africa’s sovereign credit ratings. South Africa’s sovereign credit ratings are an assessment by the credit rating agencies of the likelihood that the country will default on its obligations. South Africa still remains at sub-investment grade by two of the three rating agencies and at investment grade by one of the rating agencies. S&P Global Ratings affirmed SA’s rand debt at "BB+", first notch of sub investment grade, and kept SA’s foreign-currency debt unchanged at "BB", the second grade of junk status. Moody's has South Africa's rating at Baa3, keeping the country at medium investment grade. The agency has a stable outlook for South Africa and out of the three main agencies, it is the only one to have the country above junk status. At the time Moody's said it was of the opinion that the previous weakening of South Africa's institutions would "gradually reverse under the more transparent and predictable policy framework" of President Cyril Ramaphosa. Fitch rates both South Africa’s foreign and local currency debt at ‘BB+’, one notch below investment grade.

Discussion
Dr D George (DA, Western Cape) appreciated the presentation by the PBO, and commented on the macroeconomic outlook, specifically the low economic growth projections. The outlook did not look rosy at all. The country was confronting challenges which needed robust remedial action. He asked for comments on the sustainability of the current macroeconomic trajectory particularly amidst an increasing debt burden, rampant corruption and increased government expenditure. 

Mr N Gcwabaza (ANC) asked if the PBO had looked into the reasons why the above average performance of government was not linked to improvements in ordinary people’s welfare. What accounted for the improvement in the deficit level when compared to the previous year?

Mr F Essack (DA, Mpumalanga) said the PBO overview was of interest to the Committees. He wanted to know what tax buoyancy meant as alluded to in the presentation. Why was fruitless and wasteful expenditure in SOEs only being addressed now, given it has always been international best practice for many years to address challenges in public entities? 

Ms D Senokoanyane (ANC) asked about the implications of the negative findings and the unavailability of reports from provinces.

Mr M Chabangu (EFF, Free State) noted the proposal to have early childhood development (ECD) centres moving to the Department of Basic Education, as announced by the President during his State of the Nation Address. He asked for the PBO’s views on this. What were the reasons behind slow revenue collection and what should be done to bring about efficiency at the South African Revenue Service (SARS)? What was it that was going to be done to improve the situation in municipalities?

Ms N Ntantiso (ANC) thanked the PBO for its sterling work. She asked about what should be done to deal with fruitless and wasteful expenditure within departments and public entities. Consequence management was crucial in all spheres. Further, the VAT increase as well as the Health Promotion Levy ought to be revisited to evaluate their impact and effectiveness. On the new business model for Eskom, had the PBO looked into it? What could be the best strategy for Eskom moving forward?

Ms T Tobias (ANC) said there was need for the modelling of the various macroeconomic indicators on a regular basis to inform policy. This would enable all stakeholders to argue from informed positions. To a certain extent, the PBO had taken the stance of going against the State’s policy interventions in SOEs as well as the role of such companies in a developmental state. This would be a subject for future engagements and there would have to be a separate platform for such discussions. One fundamental question was whether Eskom would put pressure on the expenditure ceiling and juxtaposing this with the gap between revenue collection and expenditure in the current period. She asked for views from the PBO. Also, there was need for an analysis of the feasibility of tax incentives at a later stage. 

Ms Phosa wanted to know where the money to bail out Eskom would possibly be sourced from given there was already an expenditure ceiling in place.

Mr De Beer pointed out the PBO could not give responses on behalf of departments; it could only provide analysis to assist Members in their oversight work when engaging with the Executive. The reality was the country is in a highly constrained fiscal position and the question was what should be done to take South Africa forward.

Mr Amra, in response, said government's financial support for Eskom might put pressure on the state's ability to maintain the expenditure ceiling, and may have implications for government debt. Reforms for state-owned enterprises could impact the country's ability to meet estimates on debt over the medium term. Government has managed to maintain the fiscal ceiling for the past seven years. There are certain expenditure pressures presented in last year's budget like [fee-free] higher education, which required adjustments to the budget estimated in the medium-term budget policy statement in 2017. If government attempts to maintain the ceiling; where would additional resources be made available from? Secondly, if government is unable to make space in existing expenditure allocations for fiscal support to Eskom, this could result in additional debt being issued. This will have implications of debt as a share of GDP over the medium term. He added the PBO makes own macroeconomic forecasts and projections, and reassesses the accuracy of government’s growth estimates and forecasts periodically.

Ms Orlandi stated that the PBO had not undertaken any further analysis on Eskom following the announcement of a possible restructuring by the President. On tax buoyancy, it is the measure of efficiency and responsiveness of revenue mobilisation in response to growth in GDP. Actual buoyancy has been seen to be on a declining trend, and this was cause for concern. Both PIT and CIT had performed rather poorly on year-to-date, consistent with the numbers from gross and net operating surplus by corporates.

Ms Mnguni said the Public Finance Management Act has sufficient guidelines on consequence management but its actual implementation was what is in question. There appears to be concerted efforts to address fruitless and wasteful expenditure particularly through the strengthening of the Auditor-General’s powers as provided for by the Public Audit Act. It would be prudent to evaluate the effectiveness of tax incentives before implementation.

Closing remarks
Ms Phosa appreciated the engagement. The briefing provided Members with valuable insights in preparation for the Budget presentation the following day. 

The meeting was adjourned.

 

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