Medium Term Budget Policy statement: Minister & National Treasury remarks

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Finance Standing Committee

31 October 2019
Chairperson: Mr Y Carrim (ANC), Mr J Maswanganyi (ANC)
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Meeting Summary

The Finance and the Appropriations Committees of the National Assembly and National Council of Provinces, as well as provincial committee members, met with the Minister of Finance and National Treasury for a preliminary discussion on the Medium Term Budget Policy Statement which the Minister had delivered to Parliament the previous day.

The Minister told the hearing that the economy faced “fundamental challenges and contradictions”. Measures had to be found to boost economic growth in a low-revenue environment with high expenditure expectations. The fiscal deficit was growing and debt service costs were becoming a significant challenge. The biggest risks to the economy were low revenue collection; the situation at several state-owned enterprises (SOEs), including Eskom and SAA; the public sector wage bill; and “fiscal leaks” due to theft and corruption as well as litigation against the state. If all current claims against governments departments such as health and police were to be settled, it would cost R100 billion.

The National Treasury Director General said projected economic growth had been revised downwards to 0.5% from the 1.5% estimated in February. Priorities outlined in the MTBPS included stabilising public finances and promoting investment and growth. He said the debt to GDP ratio would become unsustainable if nothing was done. In addition to planned spending cuts of R80 billion over three years outlined in the MTBPS, there was also R150 billion in “wage bill measures” which would have to be the subject of intense discussion with labour unions.

Committee members expressed concern about the rising debt to GDP ratio, saying this would be a burden on future generations. They raised questions about Eskom’s ability to repay its loans and suggested that some SOEs should be sold. They asked for clarity on e-tolling in Gauteng, with one member stating that people would refuse to pay the tolls. Concern was raised about a reported trade union threat to shut down power stations if Eskom was unbundled.
 

Meeting report

Minister’s remarks
Minister of Finance, Mr Tito Mboweni, said the economy faced “fundamental challenges and contradictions”. The central issue was economic growth and development and the empowerment of the historically disempowered. In a “a concoction of contradictions”, measures had to be found to boost economic growth in a low-revenue environment with high expenditure expectations. Attempts to boost the economy included supporting tourism and agriculture; a “reimagined” industrial strategy, including support for industrial parks; working closely with municipalities on water and sanitation issues; and getting heavily loaded trucks off the highways and their freight onto the railways.

The Minister said the fiscal deficit was growing and debt service costs were becoming a significant challenge. He listed the biggest risks to the economy:
• Low revenue collection which put pressure on the fiscus.
• Situation at state-owned enterprises (SOEs): Eskom, SAA, SA Express, Denel, SABC and Alexkor.
• Public sector wage bill presented a significant challenge and there had to be negotiations with the unions. The Minister repeated his earlier accusation that former public service and administration ministers Faith Muthambi and Richard Baloyi signed off on wage agreements without a mandate. “Whether Faith Muthambi likes it or not, she was part of creating this problem,” he said.
• Risk to the fiscal framework posed by “fiscal leaks” due to theft and corruption as well as litigation against the state. If all current claims against governments departments such as health and police were to be settled, it would cost R100 billion.

National Treasury
Mr Dondo Mogajane, Director General: National Treasury, said projected economic growth had been revised downwards to 0.5% from the 1.5% estimated in February.

 Priorities outlined in the MTBPS included stabilising public finances and promoting investment and growth. The debt to GDP ratio would become unsustainable if nothing was done.

SOEs had to be stabilised. It was necessary to fix Eskom’s operations before there could be talk of restructuring its debt. Eskom should do what the Treasury did when debt became unsustainable - cut budgets. SOEs should be able to function without government support. If they could not run as businesses, they should be shut down.

Spending efficiency had to be improved. There was still a lot of waste. There should be a “relook” at procurement rules in the Public Finance Management Act (PFMA) and the Municipal Finance Management ACT (MFMA). Situations arose where the lowest of three bids in a tendering process was still higher than the market price of the item being procured.

In addition to spending cuts of R80 billion over three years outlined in the MTBPS, there was also R150 billion in “wage bill measures” which would have to be the subject of intense discussion with labour unions.

Discussion
Mr K Morolong (ANC) suggested that a projected debt to GDP ratio of 70% in three years would be a burden on future generations. He asked what the cost impact was of government officials having to travel between Pretoria and Parliament in Cape Town. A state of the art video conferencing centre in Pretoria could cut these costs. He commended plans in the MTBPS to cut cell phone and travel costs, but he wondered how significant these savings would be.

Mr G Hill-Lewis (DA) said the Minister’s MTBPS speech had been silent on the sale of Eskom assets. He suggested that giving loans to Eskom amounted to “creative accounting,” because Eskom was unable to repay the loans. An earlier government loan had to be converted into equity. He asked if there were plans for an immediate shut-down of SA Express.

Mr S Swart (ACDP) asked how accurate projected revenue shortfalls were for the years ahead. He welcomed the additional funding for law enforcement agencies, but suggested that this could be doubled, given an estimated R500 billion that had been lost because of corruption. On an announcement that SOEs would receive loans instead of bail-outs, he commented that “we’ve followed that path before”. He asked for reaction to a report that the National Union of Mineworkers (NUM) had threatened to close power stations if Eskom was unbundled.

Mr D Joseph (DA) commented that tourism and agricultural exports presented great opportunities for economic growth. He asked when last a head-count of employees in the public service and at SOEs had been done. He asked where the line should be drawn on public sector wages and what was up for negotiation.

Mr W Wessels (FFP) asked what the impact of a credit downgrade would be on the country. He asked why SA Express and Alexkor should not be sold right away. He said there appeared to be a discrepancy on e-tolls in the copy of the MTBP speech distributed in advance and the speech delivered by the Minister. The first said the Gauteng freeway e-tolls would remain but the second did not. The speech had been silent on food security and the imminent danger of water scarcity. What plans were there to address these issues?

Mr A Shaik Emam (NFP) said many businesses were at a standstill. The government should consider reducing VAT to encourage consumer spending, which would in turn strengthen revenue collection. He suggested that local authorities could assist in identifying illicit financial flows.

Mr F Shivambu (EFF) said people in Gauteng would not pay “unjust” e-tolls. He referred to suggestions that municipalities’ outstanding debt to Eskom should be deducted from their budget allocations. In the case of Soweto, the electricity for which money was owed was used by unemployed people who could not afford to pay. The only solution was to write off the debt.

Mr Shivambu said the MTBPS referred to an initiative by the SA National Defence Force (SANDF) to procure food from producers closest to its bases. This should be broadened into a strategic import substitution programme. A “reimagined” industrial policy could not be divorced from trade policy and issues like tariffs on imports. He could see no believable plan at the SA Revenue Service (SARS) for tackling tax avoidance and profit shifting. Were e-commerce, Uber and Amazon taxed maximally?

A member of the Gauteng legislature asked for clarity on the question of e-tolls. He said the Gauteng Premier had indicated in his State of the Province Address that they would be stopped.

Ms D Peters (ANC) suggested that “top slicing” of municipal budgets to recover money owed to Eskom should be considered. She suggested that individual households could be issued with electricity meters. It was often the case that several households occupied one property and drew off the supply to the main household.

Ms Peters said it was “problematic” that the Minister had said in his speech that 29 000 public servants earned more than R1 million. She said this created a wrong impression. There were many public servants who could not even afford an RDP house.

Mr Y Carrim (ANC) said that Treasury appeared to be getting its economic forecasts wrong too often. He complained that the finance committees raised the same issues year after year without getting an adequate response from Treasury. Committee reports had recommended the establishment of an inter-ministerial committee on illicit financial flows. He wanted to know by February what the Minister’s answer was.

Minister’s replies
Replying to questions on the debt to GDP ratio, the Minister said it would impose a burden on future generations if it was not managed very well. In 2016/17 the ratio was 50.6%. It was “galloping” now towards 80.9% of GDP by 2028. In 2016, GDP at current prices was R4.6 trillion. The estimate for 2019 was R5.1 trillion. If the debt to GDP ratio was 60% in 2019 this would equate to R3 trillion. “In my book that’s unsustainable.”

It was claimed in some economic literature that debt levels did not matter and that the composition of the debt should rather be taken into account. “Well, I’m sorry to say that debt matters,” the Minister said. Debt service costs were now at 13.7% of expenditure. This meant less money for social spending. Only reserve currency countries could afford high levels of debt. South Africa could not be compared to the US.

The way to deal with the debt was to contain spending and grow the economy to generate more revenue. Government would sell some assets and reduce costs in many areas. There would be discussions with the Department of International Relations and Cooperation about rationalising missions abroad.

The Minister said the example of the SANDF in procuring food locally could be followed by other  departments. Correctional Services owned large farms where they could grow their own food. There were so many non-core assets in the hands of the state that they were in danger of disappearing. They needed to be sold.

On SA Express, he said there was no logic in having it and SA Airlink competing with one another. SA Express should be closed or folded into Airlink.

Regarding SAA, he understood that there were conversations with possible equity partners. He hoped they would be concluded positively.

The Minister said he had been told by the CEO of SAA that a whole spare engine had disappeared from SAA Technical Services (SAAT). It “boggled the mind” that such a big object could leave the airport. To be properly serviced SAA aircraft now had to be flown empty to Jordan and back because capacity at SAAT had been destroyed.

The Minister said the suggestion about video conferencing facilities in Pretoria was very helpful, but would not solve the fundamental problem: parliamentarians and the executive had to agree to have one capital for the country, which might have to be Pretoria. He had served on a parliamentary sub-committee in 1994 which had concluded that parliament should be moved to Pretoria. This had led to a “massive invisible campaign” by political parties and others. “I can tell you, at the end of the Sixth Parliament you will not have resolved that issue. At the end of the Ninth Parliament you will not have resolved the issue,” he said.

On cell-phone and travel savings, the Minister said the state spent R5 billion on phone charges in 12 months. There was too much international travel. Trips needed to be coordinated better.

On loans to SOEs, he said while a private company could recapitalise through a rights issue, the state was the only shareholder in an SOE. Taxpayers would pay for a rights issue.

On the reported threat by the NUM to close down power stations, the Minister said his time as Minister of Labour had taught him not to be alarmed by initial statements. Government and the unions should understand that they were in a difficult situation and work together to resolve it.

While there had been talk of “top-slicing” municipal budgets, the effect on delivery of services to people had to be considered. There were indigent benefits for water and electricity for poor people. The basic principle was that if people used a service they had to pay for it. In Gauteng, e-tolls were necessary to ensure there was a return on the investment made in the Freeway Improvement Project.

The Minister concluded his remarks with a plea to political parties to have a conversation with their supporters about re-establishing a culture of payment.

The meeting was adjourned.
 

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