2019 Revised Framework: response by National Treasury to public submissions

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Finance Standing Committee

08 November 2019
Chairperson: Mr Y Carrim (ANC; KwaZulu Natal)
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Meeting Summary

The Finance Committees of the National Assembly and the National Council of Provinces met jointly to received the National Treasury’s response to the public submissions on the 2019 Medium Term Budget Policy Statement (MTBPS).

Three main areas of discussion were identified: economic growth and revenue forecasts, fiscal sustainability, and general budget matters like infrastructure expenditure and financial support to state-owned enterprises (SOEs). Reasons were given for the revision of the fiscal framework, as well as the economic forecasts. Another issue raised was the debate between austerity budgeting and more economic stimuli. The government tried to balance competing requirements, reducing debts and stimulating the economy to achieve a sustainable medium to long term outlook. South Africa was in a fiscal dilemma in a low growth, high debt environment. The Treasury proposed a reduction in spending, mainly in the public wage bill, as a fiscal crisis had to be avoided at all costs. The presentation also provided interventions to support public infrastructure spending and interventions to stabilise Eskom and other state-owned companies. Recommendations were given on how to improve spending efficiency and how to reduce wasteful spending. The excise duties on tobacco, and the need to clamp down on the illegal cigarette trade, were discussed.

The Committee complained that the Treasury had given only a brief overview of the MTBPS, while it was actually supposed to answer to the specific public submissions of civil society. They described the presentation was insightful, but it did not address the actual topic of the meeting. Representatives of civil society organisations inquired about better enforcement of tax collection in the tobacco industry, expenditure on the Grand Inga Dam project, as well as the impact of a reduction in the public wage bill on lower-income public servants.

Members of the Committee cast doubt on the credibility of the Treasury’s forecasts over recent years. Although it had proposed reductions, the debt deficit continued to grow. The possibility of further tax increases was discussed. A Member repeatedly raised the issue of misused infrastructure funds at the provincial and local level to fund operating costs and salaries, at the expense of service delivery. Another Member proposed increasing pensions to a living wage level of around R2 500 a month.

A letter from the Helen Suzman Foundation was discussed. It raised a legal issue concerning the role of the Committee in reporting on the MTBPS. The Foundation argued that the proposed three year fiscal framework – once approved by Parliament – should be binding on the executive. The Chairperson ruled that this was not a policy matter -- it was a legal matter -- and should be dealt with by lawyers.a

Meeting report

Opening Remarks by Chairperson

Mr Y Carrim (ANC, KZN), Chairperson of the Select Committee on Finance, chaired the joint meeting, and said that from next year, Mr J Maswanganyi (ANC), Chairperson of the Standing Committee on Finance, would take the responsibility.

The two Committees expected responses from the National Treasury (NT) to the submissions of civil society on the medium term budget policy statement (MTBPS). After the Treasury’s response, representatives of civil society organisations (CSOs) had the opportunity to comment. It should be a full discussion. He explained the procedure for the upcoming Committee’s report. The Chairpersons would get the report by Sunday evening and send it to all parties on Monday. On Tuesday, at the next joint meeting, the Committees would go through it section by section. Civil society stakeholders should submit one page with their summarised key points. The Committee’s main focus was on the recommendation section. The report should not be longer than eight to ten pages. It should include all oral as well as written submissions. Five to six pages of the report should be on observations and recommendations. Any proposed changes to the report had to be submitted by Monday night in writing. He suggested compiling one combined report on recommendations on the revised fiscal framework for the current financial year, and recommendations for the proposed fiscal framework. It should be one report instead of two separate ones.

Adv Frank Jenkins, Senior Parliamentary Legal Advisor, confirmed that one combined report was possible, but the Committee had to clearly indicate whether the revised fiscal framework was adopted or not.

The Chairperson asked whether a formal resolution was needed to compile a combined report, or if it was just the choice of the Committee.

Adv Jenkins said that a formal resolution was not required. If the report was adopted by the Committee, it fulfilled all legal requirements.

The Chairperson asked whether two separate debates were necessary. It was a difficult process. During the last debates, Members of Parliament did not indicate whether they were commenting on the revised or proposed fiscal framework. The recommendations for the revised and proposed fiscal framework had thus been mixed up, yet neither the Speaker of the National Assembly (NA) nor the House Chairpersons intervened. Why was that allowed? It was a very sophisticated model, which might work in advanced industrialised countries with established democracies, but it did not work in emerging democracies. Were two debates necessary?

Adv Jenkins explained that if there was one combined report, one debate was sufficient. More clarification could be given by the table staff of the NA and the National Council of Provinces (NCOP).

The Chairperson summed up that the Committee agreed on one combined report. However, the recommendations should be clearly assigned either to the revised or proposed fiscal framework. The matter was mostly a concern of the Standing Committee, as the Select Committee was primarily dealing with issues of provincial interest. The Committees should not duplicate each other. The Select Committee would focus on provincial matters. Although the Committees were equal, the Select Committee did not play a dominant role in this matter. It was more concerned about the division of revenue and the Appropriation Bill. The fiscal framework was about the economic focus, inflation rate and debt-to-GDP-ratio of the whole country, not the provinces. Therefore, the NA and the Standing Committee should take the lead. The Chairperson argued that the Committees duplicated each other too much and too often. He said Mr D Ryder (DA; Gauteng) seemed to partly agree with him. However, the Democratic Alliance (DA) would take the argument to its extremes, regarding provinces as federal states.

National Treasury on public submissions

Mr Ian Stuart, Acting Deputy Director-General (DDG): Budget Office, National Treasury, said this time the NT had received the longest list of submissions from a wide range of organisations at public hearings on the 2019 MTBPS. The Treasury had gone through the submissions in great detail. Three main areas of discussion could be identified: economic growth and revenue forecasts, fiscal sustainability, and general budget matters, like infrastructure expenditure and financial support to SOEs.

The DDG introduced the MTBPS briefly and explained the reasons for the revised numbers. The reduction in the nominal gross domestic product (GDP), the reduction in tax revenue and the increase in spending pressures were the three main drivers for the worsening of the fiscal situation and outlook. The latest debt-to-GDP-ratio projections were presented. The real GDP growth and tax revenue forecasts by the National Treasury and other respected international financial institutions were shown, as many submissions had raised the issue of the forecasts’ credibility. The Treasury’s forecasts were relatively accurate and slightly better in comparison to other institutions.

Mr Stuart recommended economic reforms to raise GDP growth. The Treasury argued that a combination of fiscal measures and growth measures was needed to balance the public finances. A main point of discussion within the submissions was the question whether the fiscal choices government made had slowed down the economy. Another point was whether or not South Africa had an austerity budget/ On slide 7, it became evident that the increase in the debt-to-GDP-ratio was among the highest in comparison to peer countries. South Africa had added more debt than most of its peers due to growing non-interest spending. The country did not have an austerity budget, but was actually experiencing a growth in spending.

The government had tried to balance competing requirements: reducing debts and stimulating the economy to achieve a sustainable, medium- to long-term outlook. The illustrated development of the budget deficit showed a structural imbalance between revenue and expenditure. The sharp rise in deficit was caused by the increased wage bill, expanded coverage of the social grant system and increased financial support to state-owned enterprises (SOEs). There was a persistent gap between revenue and expenditure that could be closed only by raising GDP in combination with fiscal measures. Slide 10 listed the growing expenditure per function group, with the biggest one being debt-service costs. The repayment of interest rates on borrowed money was the fastest growing expenditure category. Borrowing money could solve short-term problems, but had long-term consequences.

The Chairperson noticed that the DDG was giving an overview of the budget and the MTBPS. However, the Treasury was actually supposed to answer to the submissions of civil society. The presentation was very unusual, regarding the actual purpose of the meeting. The Committee was answerable to civil society. When was the Treasury answering to the concerns of civil society, so that representatives of CSOs could comment and the Committee could make recommendations?

Mr G Hill-Lewis (DA) disagreed. The presentation highlighted the major discussions in the submissions, such as the debate between more economic stimulus and austerity. The DDG was not just briefing the Committee on the MTBPS, but he was methodicly and very comprehensively addressing this debate. He appreciated it. This was not a general briefing -- the DDG was answering to raised concerns.

The Chairperson said that the Members of Committee had to decide if the presentation was satisfactory or not. At one time, the Treasury had to answer to civil society. He suggested to Mr Hill-Lewis that he should meet up with the Treasury over the weekend to discuss the responses. He himself did not have time for a presentation that presented only the MTBPS. Today’s meeting was a public hearing. Representatives from CSOs had come from Johannesburg to listen to the Treasury’s answers. The Chairperson asked for the Committee’s opinion.

Mr G Skosana (ANC) agreed with the Chairperson. Although the presented information was very valuable, today’s agenda was about answering specific questions that had been raised by various stakeholders. The given information was insightful, but maybe it should be presented on another day. Today was reserved for responses to public submissions. He expected to hear the view of the Treasury on the raised concerns, otherwise, people would leave the meeting after three hours without having received an answer.

The Chairperson suggested Treasury should find the right balance between briefing and responding. The meeting had to end at 12:15 p.m. at the latest.

The DDG gave an assurance that the presentation answered the main issues raised in the public submissions. On slide 11, he explained the breakdown of government expenditure in categories. The compensation of employees required the biggest bulk of funds. Much of the debate was about setting up specific financial targets, like a 70% limit for the debt-to-GDP-ratio. The Treasury proposed targeting a main budget primary balance by 2022/23. Too specific fiscal targets were difficult to apply in highly uncertain economic environments with increasing inflation and fluctuating currency exchange rates. Fiscal targets had to be considered carefully. A 60% or 70% limit for the debt-to-GDP-ratio – as put forward in several submissions – would require massive fiscal measures over the next three years.

Another question raised was whether to increase borrowing and spending or to aim at more fiscal consolidation. Both ways had negative implications for the economy. The figure on slide 11 presented this fiscal dilemma in a low growth, high debt environment. The MTBPS proposed a middle way, with a focus on growth reform and a three to five-year plan to stabilise the debt-to-GDP-ratio.

Another discussion in the public submissions was the austerity versus more stimulus debate. The Treasury proposed a reduction in spending, as more borrowing and a growing expenditure could lead to a profound fiscal crisis. A fiscal crisis must be avoided at all costs. Reduction should mainly take place in employee compensation. Fairness was critical when reducing the wage bill, meaning a higher burden on higher income earners.

There were only limited options for tax increases. Revenue should rather be increased by a more efficient tax collection through municipalities.

Further debate was on the under-spending on public infrastructure , which was declining. This was a major concern. Interventions to support public infrastructure spending and interventions to stabilise Eskom and other state-owned companies were provided. Recommendations were given how to improve spending efficiency and how to reduce wasteful spending. Lastly, the excise duties on tobacco were discussed.

Comments by civil society organisations

Tobacco Institute of Southern Africa

Mr Francois van der Merwe, Chairperson: Tobacco Institute of Southern Africa (TISA), emphasised that as already stated at the last meeting, enforcement was the key. On that point, he agreed with the National Treasury. 31 billion cigarettes were sold and smoked in the country per year, yet taxes were collected on only around 19 billion. That left a gap of 11 billion, costing the fiscus R8-10 billion a year. More than R20 million was leaked from the Treasury by tobacco companies every day. The companies and brands were known. The information had been shared with the Committee and the South African Revenue Service (SARS). The track and trace system was all good and well. For good reasons, the deadline for a SARS study had been postponed three times, until the end of March next year. The establishment and implementation of the successful track and trace system in the European Union had taken four years. South Africa could not wait four years for a track and trace system to be implemented, when R20 million was lost every day.

In line with a TISA proposal, SARS had placed officials within tobacco companies. There had been an initial impact, with a slight increase in taxes, but now there was no improvement as the companies had found ways to run rings around the SARS officials. The SARS officials needed further training.

Another TISA proposal suggested production counters on cigarette machines. At the moment, the tobacco industry operated on an honesty-based system, whereby companies had to self-declare their production volume. It did not work. More technology was needed, like counters on production machines. However, the implementation would take another year.

The National Treasury was always preaching ‘enforcement,’ but how long could the country wait for enforcement to take place? Enforcement was only one part of stopping the illicit tobacco trade. Excise was the main driver of price. The government was the biggest shareholder in the tobacco industry, so it had to take responsibility. At least, the Treasury had to stick to its own policy of a targeted incidence of 40% on all tobacco categories for the most popular price class in that category. If TISA’s plea for an excise freeze or excise reduction was not honoured, then at least Treasury should stick to its own policy. TISA fully supported the argument of enforcement, but it took a long time to implement.

The daily leakage of R20 million was a “low-hanging fruit.” South Africa did not have a big smuggling problem -- only a small percentage of products came from abroad. The biggest leakage of tax money was caused right here in the country. TISA asked for guidance from the Committee on how to proceed.

WoMin African Alliance & International Rivers

A representative of WoMin African Alliance & International Rivers inquired about the funding for the Grand Inga Dam project. It was not clear from the budget how much money had been allocated to it. Besides, before any money was spent on the project, there needed to be a transparent credibility and feasibility study. The organisation’s submissions had not been addressed at all.

The Chairperson highlighted that the work of each Portfolio Committee had financial implications. The Standing Committee on Finance and the Select Committee on Finance were not ‘Super-Committees’ that could replace other committees. This matter had to be referred with recommendations to the Committee on Energy, but in the meantime, Treasury had to respond to the specific submissions.


Congress of South African Trade Unions
Mr Tony Ehrenreich, Western Cape Regional Secretary: Congress of South African Trade Unions (COSATU), appreciated the Treasury’s responses. According to COSATU’s presentation done by Mr Matthew Parks, COSATU had asked for the opportunity to consider today’s debate and to make further submissions on it. More details on the funding for SOEs were required. Matters relating to the public service had to be discussed in the Public Service Co-Ordinating Bargaining Council. With the Committee’s permission, COSATU would like to make further detailed submissions on today’s responses by the Treasury.

The Chairperson explained that the report had to be adopted on Tuesday, so further submissions had to be submitted to the Committee Secretary by noon tomorrow.

National Treasury’s response

Mr Stuart clarified that there no budget had been allocated for the Grand Inga Dam project. The Treasury aimed at strengthening transparent funding processes for big infrastructure projects. There were public concerns that some infrastructure projects were not considered for funding. He emphasised that there had been an improvement in the quality of infrastructure projects. The decision for funding large infrastructure projects like the Grand Inga Dam had to be made carefully to prevent wastage. The budget facility for infrastructure would consider different projects to ensure that the Treasury had the technical capacity to understand very large infrastructure projects.

On the public wage bill, government still had to engage with COSATU. The detailed submissions on the fair distribution of impact when reducing the wage bill had been taken into consideration. The Treasury had heard COSATU’s demand that all changes in the public service had to be applied to all parts of the public sector, like SOEs.

On the targeted incidence of 40% on all tobacco categories, the tax team would take this proposal into consideration. The Treasury had heard the proposal, but tax proposals were not included in the MTBPS. Treasury had just opened up for public comments and changes on taxes. A large number of inputs were anticipated. Tax changes would be part of the discussions ahead on the next February budget.

Discussion

Mr Hill-Lewis commented on the credibility of the Treasury’s forecasts. The presentation had not included that seven months ago, the forecast had been triple the current one. It might be in line with other financial organisations’ estimations, but there was no explanation as to how the forecast had dropped by 66% in just seven months. This really undermined the credibility of the forecasts. Why did the Treasury get it so wrong? He asked how the Treasury thought about it, when other credible institutions like the Parliamentary Budget Office (PBO) would impose their own forecasts on to the Treasury. What was the Treasury’s view on that?

On growth reforms, what was the Treasury doing to fast-track small-scale power generation? There were 17 outstanding applications on the Minister’s desk. They could mitigate the current power crisis. The applications just needed to be signed.

He appreciated the details on the austerity-stimulus debate. Both the Treasury and the PBO had lost credibility on this question. Initially, the Treasury had insisted on a reduction of expenditure, but the expenditure and debt level had continued to grow. It was definitely not an austerity budget. The problem was that expenditure grew in areas like the bail-out of SOEs, instead of service delivery and infrastructure. The PBO claimed that it was an austerity budget, and demanded still more stimuli. That argument was fundamentally lacking credibility, given the reality of the fiscal situation. Infrastructure spending could be an economic stimulus -- more funds should be allocated to infrastructure and less to consumption. What did the Treasury do to protect infrastructure budgets at the provincial and local level?

Large infrastructure projects took years in planning and implementation, but there were hundreds, if not thousands, of small infrastructure projects that should be taking place all over South Africa on a daily basis. They were not taking place, as municipalities used money from infrastructure funds for consumption and the compensation of employees. What was being done to guard these dispersed infrastructure budgets?

Finally, the Treasury had identified necessary cuts of around R150 billion in the public wage bill, but it had not yet started to talk to the trade unions about this. Government still needed to consult with COSATU. How was it possible or feasible to get an agreement with the trade unions ahead of February? Was this really a credible target for expenditure reduction?

Mr Ryder felt like he had dressed up for the matric dance, but his date let him down and the DJ was not playing any music. The content of the presentation and meeting so far was not as planned and expected. The presentation was insightful, but did not address the actual topic of today’s meeting. Only some of the broad debates had been addressed, but detailed responses to public submissions were lacking. Articles 216 and 220 of the Constitution provided for Treasury control, and the Financial and Fiscal Commission’s (FFC’s) input. The FFC’s input had not been touched upon at all. The FFC had submitted a long section on local government. This was the time to respond. So far, there was only limited input from the Treasury.

He demanded a debate on COSATU’s populist statement that no retrenchments would take place. Avoiding retrenchments at all costs was not feasible any longer. Constructive proposals were needed on how to reduce the wage bill. Everyone was in agreement that the wage bill was part of the problem. The Budget Justice Coalition had given specific departmental impacts in its submission. The Treasury had not addressed this at all. CSOs had put a lot of work into their submissions, and none of them were addressed. The inputs of the Fiscal Cliff Study Group, as well as of ShotSpotter, which had suggested a more electronic and digital approach, were interesting but had not been discussed. He felt like it would have been more fruitful for him today if he had gone to his constituency.

Mr Seeraj Mohamed, Deputy Director, PBO, was confused, as Mr Hill-Lewis on the one hand had described the PBO as credible enough to impose its forecasts on to the National Treasury, and on the other hand, had described as incredible its demand for further economic stimuli. He commented that the Treasury used the notion of a fiscal crisis, even though there was no scientific evidence of such a crisis. In the academic literature, there was a huge discussion on the existence and definition of financial crises. The Treasury used the notion of a fiscal crisis to create fear. The presentation stated the profound negative impact of a fiscal crisis, without defining it. This creation of a fear of a crisis was dangerous for the economy. It affected international financial institutions and triggered a credit downgrading more than actual fiscal measures.

He criticised the alleged fiscal dilemma illustrated on slide 13. The assumption that more borrowing would lead to lower growth needed to be questioned. A credit downgrading was almost inevitable -- if not due to slow growth and Eskom, then it would be caused by rising inequality and unemployment.

If there was a concern about capital flight, then measures had to be taken, like Argentina had done, but the Treasury had proposed further liberalisation of exchange controls. This should be carefully considered. Even the International Monetary Fund argued that in certain situations, capital measures like exchange controls were justifiable. If the Treasury was worried about the amount of money leaving the country, then the flow of money needed to be slowed down. He doubted that lower exchange rates led to lower private investments. In many countries, lower exchange rates spurred investments, as exports got cheaper.

He rejected the notion that the PBO’s credibility had been diminished. When looking at growth rates or debt-to-GDP-ratios, one had to be careful about statistics. Statistics depended on definitions. One had to decide which one was more credible. For instance, on the breakdown of the budget, the Treasury used nominal numbers instead of percentages. Also, austerity had a specific technical definition.

The Chairperson welcomed the very good input, even though not all political parties might agree.

Mr Mohamed said that the PBO had no affiliations to any party. It was objective.

Dr Dumisani Jantjies, PBO, commented on the revenue options. The Treasury claimed that there was no space or option for further tax revenue. There was a big discussion on whether there was actual room left for tax increases. More creative ideas on raising the tax revenue were needed in order not to burden the low or middle income classes further. Claiming that there were no options left closed the door and shut the discussion down. It was not helpful. Creativity was needed, such as taxing digital activities. A discussion on higher revenue from the digital economy was required. At a multilateral level, discussions on the digital economy were on-going within the United Nations and the Organisation for Economic Cooperation and Development (OECD). This was also needed on a national level.

Mr Z Mkiva (ANC; Eastern Cape) talked about the idea of raising pension grants to a living wage level. Treasury should also consider the possibility of exempting pensioners from paying value-added tax (VAT). He asked the Treasury to calculate how much it would cost to raise pensions to a living wage level (around R2 500 per month). What would be the cost to the national fiscus? In his opinion, exempting pensioners from VAT would not be harmful.

Mr Hill-Lewis said that every budget was a trade-off. Only very little space was left for increasing taxes. South African households were under serious financial stress. One had to work within one’s means: if one continued to pay off debts, one had less money for food, electricity and water. There was no infinite capacity for borrowing money. That argument undermined the credibility of the PBO. This was not to say that PBO was not credible on other questions. Furthermore, there was an internal contradiction in PBO’s reasoning -- on the one hand to want more household consumption, and on the other, to tax households more. Taxes reduced household consumption spending.

He said he did not usually praise COSATU for their economic inputs, but COSATU’s submission was thoughtful and credible, as it was aware of the consequences of a credit downgrading. He found it staggering that the PBO stated a downgrade was inevitable. Taking a downgrade for granted and just continuing borrowing was not responsible economics. It would make South Africans poorer. He strongly opposed a VAT increase, since VAT fell mainly on the poor, who spent a greater proportion of their income on retail products. Loading up the tax burden of the poor to bail out SOEs was irresponsible. Everyone would like to spend more money on social services -- he certainly would but as long as the government continued to pay R56 billion this year and R33 billion next year only to Eskom, an increase in social spending was impossible. That was the trade-off.

Mr Skosana asked why the Treasury dealt with the issue of taxes separately. Submissions in relation to taxes had been taken separately. Why were they not included in one package? The submission of the South African Institute of Chartered Accountants (SAICA) stated that the consistent and significant increases of various taxes in the past few years had had a negative impact. Further increasing taxes would yield counter-results -- it would cause less instead of more revenue. SAICA proposed reducing taxes in order to generate more revenue. What was the Treasury’s view on this proposal? He also asked the Treasury to elaborate on the review of local government grants.

Ms M Mohlala (EFF) commented on the interventions to stabilise Eskom and other SOEs. The Treasury had not addressed the current serious leadership crisis. Eskom’s Chairperson, Jabu Mabuza, would not assist Eskom in the future. The planned split-up of Eskom was also not assisting Eskom in going forward. In its current financial crisis, unbundling would not help. It would rather destabilise Eskom. Other means for stabilisation had to be found. Pumping money into the SOE was not helpful. In 2015, the former Minister of Finance, Nhlanhla Nene, had allocated R23 billion for Eskom and claimed that it would never happen again. However, every year more money went into Eskom with the promise to stabilise it. A clear discussion was needed on how to rescue the SOEs.

The representative of WoMin African Alliance & International Rivers asked for further clarification on financial allocations for the Grand Inga Dam project. In the MTBPS, there was a significant allocation for foreign government and international organisations on clean energy. What was this allocation for, if not for the Grand Inga Dam?

Co-Chairperson Maswanganyi noted that it was important to include the raised concerns of the PBO and the Research Unit in the Committee’s report. They had raised very significant and scientific issues. For example, the PBO had inquired which civil servant levels would be affected by the reduction of the wage bill. Would teachers and nurses be excluded? What did Treasury want to achieve? Would the reduction also apply to senior management and head offices? General terms should be avoided; details were needed. It should be scientifically calculated at which level reductions would take place. The public service also included SOEs. The chief executive officers (CEOs) and general managers earned R5 million a year, while the SOEs were collapsing. How could these high salaries of senior managers in SOEs be balanced with the efficiency of the respective SOEs? Critical questions had to be asked. The public was not happy about the bail out, as it was financed through taxes.

Personal income tax (PIT) was the biggest contributor to the government’s revenue. According to the Research Unit, the anticipated increase in PIT had negative implications on household consumption and growth, as households were already indebted. The under-declaration by companies was very serious. Companies declared profits and taxes to SARS, and SARS just took them as they were. There was a high-level of under-declaration of taxes by companies, not only in the tobacco industry, but across the entire corporate sector.

Cheap and illegal imports were another problem. In some shops owned by foreign nationals, one did not get any receipts. South African businesses suffered from that, as they operated legally. It was very hard to get a trade licence, while others just came and opened corner shops without paying taxes. These shops would also not allow refunds. Illegal trade was all over South Africa and it was hard to tax. If taxes were increased, only the business people who operated legally would be affected. Legal businesses competed with illegal traders and their cheap imports. These were fundamental issues that needed to be addressed. In the concrete industry, one million tons of cement entered the country, partly illegally. As it was very expensive to set-up a cement plant, legal traders could not compete with the cheap, illegally imported cement. This price-dumping caused problems for all those who operated legally.

The report of the Auditor-General (AG) should also be considered. The AG had identified wasteful, irregular and unauthorised expenditure. A lot of money was going down the drain. What was being done about that? If there were proper regulations and law enforcement, SARS would generate more money. He urged the Committee to include the issues raised by the PBO, the FFC, the Research Unit and the Auditor-General into its report.

He mentioned another example of unregulated business, like the taxi app ‘Uber’ in the transport sector. Legal taxi drivers were complaining and protesting. ‘Uber’ operated without a permit and generated a lot of money. Due to its sophisticated technology from the United States, SARS could not properly regulate the app. The Fourth Industrialised Revolution had implications for SARS that needed to be discussed. The same held true for online shopping. Online shopping killed big retailers. Companies like Edgars struggled and collapsed; malls would be empty soon. The government could not be quiet when such huge retailers collapsed, as they employed thousands of people. The issues had to be included in the report in detail.

The Chairperson blamed the National Treasury for not responding properly to the public submissions. The presentation had been good, but it had not included the information that the Committee had asked for. He would write to the Treasury, as the Director-General should be here. He also suggested that the Standing Committee on Finance should give its input before the February budget and the PBO could also give its comments. The two Committees could then have a joint meeting to discuss the budget.

The austerity-stimulus debate was significant. Moreover, the Treasury’s statements on economic focus were not credible. The issue had been raised before, and was going on for too long. Besides, the PBO was neither part of the executive nor of Parliament -- it was an independent body that advised Parliament. It gave policy options, regardless if political parties agreed or not. In general, the discussion had to be depoliticised. The economy had to be managed. Any political party had to deal with the same situation if it came into power overnight. The debt deficit could not be erased overnight. Everyone had to face the same reality.

The Treasury had lost credibility and the Committee could not just sit and watch. It would hold the Minister accountable. The Committee demanded action. He doubted whether the PBO could impose its forecast on to the Treasury -- it could only advise, but why did the Treasury not consult more with other institutions? Who did the Treasury draw on for support? Whose input was considered when taking decisions?

He remembered a media report from last month about the Grand Inga Dam project and about the amount of money South Africa had paid. How much money had been spent? Where did it come from? Nevertheless, the issue had to be referred to the Committee on Energy, as it fell into the energy sector. The Committee on Energy should meet with WoMin African Alliance & International Rivers and discuss the matter. It was a policy issue, not a financial matter. Some issues did not belong to this Committee, but had to be transferred to other committees and departments. Other questions on the public sector wage bill and local government could be answered in only two weeks when the Appropriation Bill was on the agenda.

The main issue with TISA was illicit financial flows, which had not been addressed at all. Every quarter, the Treasury and SARS reported to the Standing Committee on the campaign against illicit financial flows. These quarterly reports should also include the illicit tobacco trade. TISA could monitor these meetings. The Chairperson recommended a meeting between the Treasury, SARS, TISA and all relevant stakeholders of the tobacco industry to discuss the leakage of money every day. An agreement had to be made, because R10 billion was lost every year. The illicit trade also affected legitimate African farmers, who were the constituency of the ANC. The ANC presented itself as the guardian of the rural poor and emerging farmers. These farmers were sacrificed in the tobacco industry. That was why a consensus among the Treasury, SARS, TISA and the tobacco companies had to be found; the issue should not be further prolonged. It was a low-hanging fruit.

Finally, the Chairperson demanded that the Treasury respond to each submission and proposal. He repeated that the CSOs expected answers.

National Treasury’s response

Mr Stuart gave reasons for the drastically changed forecasts. There had been a shock, a contraction in the first quarter of the financial year, which had been largely driven by the occurrence of power shortages. In addition, the growth numbers in the both the services and production sectors had been much weaker. In February, the forecast had been within the range of what other respected financial institutes predicted. He agreed with the proposal to open up the forecasting process and to allow more consultation and discussion. However, he insisted that the Treasury’s forecasts were in line with other institutes. The massive shocks to the economy had been unexpected and could not be foreseen.

The Chairperson asked how the Treasury could have been wrong for so many years in a row. This financial year, there had been exceptional circumstances. However, the Treasury had got it completely wrong since 2014. Maybe all financial institutions had to change their forecasting methods. Economic uncertainty could not explain the wrong forecasts. With the existing technology and knowledge, it should be possible to make accurate forecasts.

The DDG admitted that most of the Treasury’s responses had been summarised in general. To be more specific, the proposal of SAICA argued that taxes could not be raised, as the level of taxation was already too high. That was also the Treasury’s stance. VAT, PIT and the fuel levy had been raised. Therefore, there was only very limited room for further increases. These past tax increases had generated an increase in revenue. It was not to say that there were no opportunities anymore for further increases, but the Treasury aimed for a balanced approach between closing the deficit without putting too much pressure on the economy.

The Fiscal Cliff Study Group had been concerned that the compensation of employees and debt-service costs crowded out all other types of expenditure. As shown earlier in the presentation, debt-service costs and compensation were the fastest growing expenditure categories, so the debt deficit and the wage bill must be reduced.

On the Grand Inga Dam, there was no money for the project in the baseline. There was money in the budget allocated for the International Energy Forum and the International Renewable Energy Agency.

The Chairperson inquired if South Africa had already paid any money for the Grand Inga Dam in the past. He urged the Treasury to check if any money had been paid. The response should be sent to the Committee by tomorrow at noon.

The DDG clarified that local government grants were conditional, and could therefore not be used for other purposes, like the compensation of employees. The grants were protected. The review of local government grants monitored the number of grants and improved the efficiency of government spending.

On the budget trade-off and the definition of a fiscal crisis, this was not science. It was difficult to say which specific level of debts would cause harm, but the risks of a fiscal crisis had to be limited. There was no certainty of a fiscal crisis; but the Treasury had to limit the chances of it happening. If South Africa did not reduce its debts, the debt-service costs would rise further. If debts continued to grow, the pressure on the economy would increase and it would be more difficult to change course.

On social grants, increasing pensions to R2 500 would cost R5 billion per year. More detailed calculations were needed, as this was just a high-level number. However, spending more money on social grants would require more fiscal resources in an already tight fiscal environment.

The Chairperson clarified that there was no official ANC position on increasing pensions to a living wage level. The question had been asked by an individual ANC member. There was a difference between an official ANC proposal to the Treasury and a mere request for consideration. The ANC had asked the Treasury to consider exempting pensioners from paying VAT. The ANC was aware of the severely challenging economic situation. The difference between the ANC and the DA was the proposal for counteracting measures. Both parties recognised the situation, but suggested different solutions. The ANC did not want to increase spending recklessly.

The DDG addressed COSATU’s concern over reducing the public wage bill. The reduction could happen in only two ways -- either by reducing head counts, or average wages. In the international comparison, the head count was not particularly out of line. But in relation to the GDP, South Africa spent way more on compensation for employees than its peers. This could be explained by the very strong real growth in average wages of civil servants over the last decade. This had increased the real wage by 40%. The comments on the fairness of the reduction and the inclusion of SOEs were taken into consideration, but in order to close the large budget deficit, a reduction in the average wage was required.

Mr Hill-Lewis asked for specific responses. What was the Treasury’s view on the proposal that another financial institution like the PBO impose its growth forecast on to the Treasury? It should be an independent organisation. How were infrastructure budgets protected at the provincial and local level? On the wage reduction, the Treasury should mostly reduce wages in the upper class, like senior management, and protect the wages of nurses, teachers, police officers etc. This would reduce the wage bill without affecting frontline service delivery staff.

Mr Van der Merwe said the Treasury’s response to TISA’s input had been fairly vague. The proposal to convene a meeting between SARS, the Treasury, TISA and other stakeholders was welcomed. If more time went by, more money would be lost. He urged the Committee to take its oversight role seriously. TISA fully supported the Treasury and SARS in all their actions. He pleaded with Treasury to stick to its own policies. In the meantime, enforcement had to be implemented. The targeted incidence of 40% was a huge driver in raising the price of legal cigarettes. Illegal, cheap cigarettes flooded the market and compromised the health of smokers and the profits of legal farmers.

Mr Ryder disagreed with the Chairperson, saying the issues raised by the FFC on local government should be addressed and answered today. They had a financial impact.

The Chairperson explained that the MTBPS dealt with the fiscal framework, the division of revenue and appropriation. The fiscal framework was the responsibility of the Standing Committee on Finance. The report on Tuesday was not on the entire MTBPS -- it was only on the fiscal framework and its two subcategories, the revised and the proposed fiscal framework. Appropriation issues were not included. The next meeting with the Treasury would be on the division of revenue and appropriation. At that meeting, Mr Ryder’s questions would be addressed.

Mr Stuart said that the Treasury’s forecasts were more accurate than the ones of other institutions. An external number should not be imposed on the Treasury. There were general errors in forecasting GDP, globally and nationally. It would be better to have a more open and elaborate forecasting process

Treasury agreed that infrastructure budgets should be protected. When reducing expenditure, capital budgets should be protected while consumption spending should be reduced. Most of the reduction must fall on consumption. However, in the current fiscal situation, the primary goal was fiscal sustainability. The Treasury thus proposed reductions in all categories, but mostly in consumption, including the wage bill. Another concern was that the quality and rate of infrastructure spending was lower than anticipated. Consequently, infrastructure spending had to be protected as far as possible.

In the reduction of the wage bill, fairness would be ensured by putting a greater share of the burden on high income earners. Nonetheless, large wage adjustments were needed. The vast majority of paid wages fell into income classes below senior management. Hence, it would be very difficult to avoid reductions in these lower income classes.

Helen Suzman Foundation’s submission

The Chairperson moved to the next agenda item. The letter from the Helen Suzman Foundation implied a legal matter.

Adv Jenkins explained the legal implications. The letter dealt with the accuracy of the forecasts and the value of the Committee considering the MTBPS. The letter’s question was whether – should Parliament approve the MTBPS – the proposed three year fiscal framework should be binding on the executive? The letter was written with a different understanding of the Money Bills Procedures and Related Matters Act (MBRM) and the Public Finance Management Act (PFMA). According to these Acts, the MTBPS was a mid-term projection and forecast. The letter highlighted the inaccuracy of this forecast and its implications for the next budget.

Adv Jenkins first explained the procedure of amending Money Bills as outlined in the MBRM. Accordingly, the Standing Committee and Select Committee on Finance did not approve the fiscal part of the MTBPS. The two Committees only made recommendations. The Minister would then respond to these recommendations when the new budget was introduced. If the Minister’s responses were not satisfactory, amendments could be made to the fiscal framework, the division of revenue and the Appropriation Bill. Therefore, the MBRM required the Committees to report on the MTBPS.

Secondly, the revised fiscal framework must be approved by the two Houses of Parliament. This set a limit for the Division of Revenue Amendment (DORA) Bill and the Adjustments Appropriation Bill. It created a safeguard to ensure that Money Bills were not amended beyond what was already adopted in the fiscal framework. Hence, it bound Parliament concerning the DORA Bill and the Adjustments Appropriation Bill, but not the executive. However, the letter suggested that the executive should be bound. Only Parliament was bound in considering the further amendment of Money Bills. Public participation was there to discuss such kinds of issues. Parliament had to facilitate public participation.

Thirdly, the inaccuracy of the forecasts should be dealt with by the Minister. Finally, the letter also made proposals what to put into the Committee’s report. It was irregular for an external institution to suggest what to include in the Committee’s report. In general, reports by committees were guided by the rules of the NA and the NCOP. The Committee should stick to this. This should be clarified and included in the response to the letter.

Mr Hill-Lewis wondered what would occur if the government tabled a MTBPS with a fiscal target that was not reflected in the MTBPS? It struck him that it would be a strange and unprecedented situation. Could the Committee comment on this observation?

Adv Jenkins explained that the Committee could comment on the inconsistency within the MTBPS if it liked to. The letter could be taken as a public submission. Then, the Committee could make recommendations. He laid out options for the Committee on how to react to the letter. The letter included statements on how the Committee had to work and what it had to report on. It dictated the Committee what to do. His task was to protect the Committee and to keep it within the legal rules.

The Chairperson said that the letter might have been prompted by the Minister’s statement that he was not sure of the MTBPS’s value. In fact, the Minister had said that the MTBPS should be reviewed, hinting at the assumption that it was actually not needed. Parliament, or at least the ANC, could not agree with this. The Chairperson doubted whether the Minister’s statement was supported by the government. The letter should be addressed to the Minister to ask him exactly what he meant. The Committee should refer the letter to the Minister. What did he mean? He should come to the Committee and explain himself.

It was really an unprecedented situation. The Chairperson had never come across such a request from a non-governmental organisation. He agreed with the legal advisor that the letter was going quite far. It was not a policy matter -- it was a legal matter. It should be dealt with by lawyers. A response should include that the Committee encouraged maximum public participation. This public hearing was not required -- it was initiated by the Committee. The Chairperson was confused about the Helen Suzman Foundation’s intentions behind the letter.

Regarding the question of Mr Hill-Lewis, the Treasury should explain whether this MTBPS was lacking in targets, compared to previous MTBPSs.

Mr Hill-Lewis clarified that the National Treasury had announced an explicit target verbally, but had not included it in the MTBPS.

The DDG explained that reductions were required to close the budget deficit, but the Treasury also suggested additional measures. The primary purpose of the MTBPS document was to give an overview of the state of the economy and public finances. The Treasury made proposals of what needed to be done and achieved, such as reducing the public wage bill, but the main focus was on providing credible numbers on the current situation.

The Chairperson asked the Treasury to summarise this statement within a paragraph. The letter of the Foundation would be sent to the Minister for him to respond. The Committee acted within the legal framework of the MBRM. Mr Jenkins was mandated to deal with the legal issues.

The Co-Chairperson said that the Helen Suzman Foundation had gone too far. The Foundation believed that the Committee accounted to it, and had to give reasons for its behaviour, but the Members were not elected by the Foundation. The response should include an explanation of the MBRM and the Money Bills amendment procedure. The Minister should also explain his statement. He said the Foundation had empowered itself. Non-government organisations wanted to be equal to the Parliament, executive or judiciary. This taking over of responsibility from publicly elected bodies should not be allowed. The next letter would include legal charges. There was something fishy and hidden in this letter. The Committee should not respond in detail. It only had to outline the legal process on which the Committee had embarked.

The Chairperson discussed the recommendations for the report, which should be structured according to the three main areas identified by the Treasury. Which other issues and topics should be added? Were there any further proposals? He suggested that Mr Hill-Lewis’s proposal be changed in the wording, as an external forecast could not be imposed on the Treasury. The Treasury could only consider other forecasts. It should also fundamentally review its forecasting process and methodology, and draw on more experts. Next, the Committee should highlight the issue of economic focus. More support for SARS was needed. A regular report on infrastructure spending and the progress of the Budget Facility for Infrastructure was required. The issues of the Grand Inga Dam and the increase of pensions had to be referred to the relevant committees. A few lines should deal with the letter from the Helen Suzman Foundation.

Mr Ryder commented that the FFC was not satisfied with the Treasury’s responses over the years, and that should be included. The two mandated entities, the Treasury and the FFC, should come together and find an agreement. Both entities had constitutional obligations. The Committee should recommend that the Treasury work more closely with the FFC in future and give more detailed responses.

The Chairperson agreed. The FFC was a constitutional entity. The Treasury had been quite disdainful towards the FFC in the past. Parliament had to protect the FFC. That was a very good point that should be included in the report. The report would be sent to the Members of Committee on Monday by 2 p.m.

The meeting was adjourned.
 

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