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Parliament’s finance and appropriations committees from both houses met jointly with the Minister of Finance and senior National Treasury officials to discuss the 2020 Budget. The Minister had tabled his budget proposals the previous day.
Members were told that very low economic growth had resulted in lower revenue collection. Mounting debt was a very serious issue. Debt servicing costs absorbed 15.2% of the main budget. The government would have to negotiate with trade unions to reduce the public sector wage bill by R160.2 billion. The budgeted deficit before borrowing was now 6.8% of gross domestic product (GDP).
Proposed total consolidated spending was R1 95 trillion in 2020/21 with the largest allocations going to learning and culture (R396. 4 billion), health (R229 7 billion) and social development (R309.5 billion).
The economic outlook was weak. Real GDP was expected to grow at 0.9% in 2020, 1.3% in 2021 and 1.6% in 2022. Achieving faster economic growth required far reaching structural reforms. Halting the fiscal deterioration required a combination of continued spending restraint, faster economic growth, and measures to contain financial demands from distressed state owned companies. The 2020 Budget made net non-interest spending reductions of R156.1 billion in total over the next three years, compared with the previous year’s budget projections This included large reductions to the public service wage bill.
Tax policy proposals included personal income tax relief and limits on corporate deductions to combat base erosion and profit shifting.
An amount of R60.1 billion over three years had been set aside for Eskom and South African Airways (SAA).
Members welcomed the personal income tax relief. There were questions about whether the proposed cuts to the public sector wage bill could be achieved and why yet more money was being allocated for SAA. There was support for the idea of compulsory third party insurance to alleviate the financial situation at the Road Accident Fund. Some doubt was expressed about whether austerity measures were the way to promote economic growth. They asked about debt stabilisation, providing a 13th cheque for pensioners and the proposed sovereign wealth fund.
Mr Tito Mboweni, Minister of Finance, said very low economic growth had resulted in lower revenue collection. This would have been the case even if the SA Revenue Service (SARS) was operating at full capacity. There was an increased demand for spending. Even in a stagnant economy, a growing population needed additional services.
The Minister said mounting debt was a very serious issue. Debt servicing costs absorbed 15.2 % of the main budget. The government would have to negotiate with trade unions to reduce the public sector wage bill by R160.2 billion over the coming three years. The budgeted deficit before borrowing was now 6.8% of gross domestic product (GDP). It was of fundamental importance to stick to this figure or even bring it lower.
Wastage and corruption in the public sector had to be confronted head-on. Goods sold to the public sector were overpriced. There was a growing trend of taking the government to court on issues such as medico-legal litigation and claims against the police. Some people made it their business to encourage people to litigate against the state. In Mthatha they were going door to door soliciting such business.
Briefing by National Treasury
Mr Dondo Mogajane, Director General, National Treasury, said the numbers in the Budget showed that the country’s finances were not in good shape. The key to solving the problem was economic growth and implementing policy reforms.
The Minister added that, while there clearly needed to be belt-tightening, it was also necessary to address fundamental growth challenges. He urged MPs to join the executive in implementing cost-cutting measures such as using economy class air travel. “Come and join me in economy class,” he said. “It is a bit uncomfortable, but you do arrive where you are going.”
Mr Ian Stuart, Acting Deputy Director-Budget, National Treasury, provided a summary of the 2020 Budget:
-The Budget proposed total consolidated spending of R 1. 95 trillion in 2020/21 with the largest allocations going to learning and culture (R396. 4 billion), health (R229 7 billion) and social development (R309.5 billion);
-The economic outlook was weak. Real GDP was expected to grow at 0.9% in 2020, 1.3% in 2021 and 1.6% in 2022. Achieving faster economic growth required far reaching structural reforms;
-Public finances continued to deteriorate. Low growth had led to a R63.3 billion downward revision to estimates of tax revenue in 2019 20 relative to the 2019 Budget. Debt was not projected to stabilise over the medium term, and debt service costs now absorbed 15.2 percent of main budget revenue;
-Halting the fiscal deterioration required a combination of continued spending restraint, faster economic growth, and measures to contain financial demands from distressed state owned companies;
-As a first step, the 2020 Budget made net non-interest spending reductions of R156.1 billion in total over the next three years, compared with the previous year’s budget projections This included large reductions to the public service wage bill.
The Budget proposed reforms to reduce the cost of doing business in several areas:
-Electricity: Additional electricity would be acquired from existing independent power producers (IPPs); a fifth bid window would be opened for IPPs; an additional 2 000 to 3 000MW of emergency power would be acquired; municipalities would be allowed to procure power from the private sector; changes would be made to electricity regulations to allow for self generation;
-Ports: Corporatisation of National Ports Authority would be accelerated;
-Rail: An Economic Regulation of Transport Bill was tabled before Parliament. Implicit in this was that subsidisation of road freight should cease;
Telecoms: Digital migration would be accelerated and work would continue on releasing spectrum through an auction. The Independent Communications Authority of South Africa (ICASA) had to enforce open access conditions and issue rapid deployment guidelines;
-Small business would be supported and industrial policy enhanced by implementing the Competition Commission’s recommendations on retail and telecoms. An Ease of Doing Business project made proposals such as the launch of a Bizhub internet portal. There were sectoral master plans to boost investment and employment.
Mr Stuart stated that the composition of government spending was worsening. Between 2013/14 and 2018/19, the government had repeatedly reduced the expenditure ceiling, slowing spending growth. Most reductions were applied to goods and services and capital budgets, while leaving the wage bill relatively unchanged. Current transfers had grown as a result of increased support for higher education and larger Unemployment Insurance Fund (UIF) payments.
The main budget non-interest expenditure baseline would be reduced by R156.1 billion over the next three years in comparison with 2019 Budget projections. This figure reflected reductions to spending baselines of R261 billion, which included a R160.2 billion reduction in the wage bill of national and provincial departments, and national public entities. It also reflected reallocations and additions totalling R111.1 billion, of which R60.1 billion was set aside for Eskom and South African Airways (SAA) and R24 billion for critical spending priorities.
Tax revenue estimates for the current year had been revised down by R10.7 billion compared with the 2019 medium term budget policy statement (MTBPS) estimates. In addition, the government had chosen not to apply additional revenue measures of R10 billion for the next year that were projected in the previous year’s budget. Tax revenue was projected to grow by 4.9 per cent in 2020/21, with gross tax buoyancy falling to 0.93 as a result of lower wage growth.
Tax policy proposals for 2020/21 provided for:
-Personal income tax relief through an above inflation increase in the brackets and rebates
-Further limits on corporate interest deductions to combat base erosion and profit shifting
-Restrictions on the ability of companies to fully offset assessed losses from previous years against taxable income
-An increase in the fuel levy of 25 cents a litre, consisting of a 16 cents increase in the general fuel levy and a 9 cents increase in the Road Accident Fund (RAF) levy to adjust for inflation
An increase of R3 000 in the annual contribution limit to tax free savings accounts from 1 March 2020
-Increases in excise duties on alcohol and tobacco of between 4.4 and 7.5%
Consolidated spending for the coming three years provided for:
- R1.248 trillion to be spent on learning and culture
-R970 billion for social development
-R778 billion for debt service costs
-R731 billion for health
-R683 billion for community development
-R681 billion for economic development
-R667 billion for peace and security
-R217 billion for general public services
-R15 billion or the contingency reserve
The Minister commented that the executive needed to be held to account for ensuring that the public obtained value for money. There was likely to be a “lot of conversation” about whether peace and security had been allocated a fair share. The allocation of R5 billion a year to the contingency reserve was very small when South Africa’s role in assisting with regional disasters was considered.
Mr Stuart said National Treasury and provincial treasuries had worked to get municipalities to revise their budgets. Three quarters of them now had funded budgets. The remaining 66 had been asked to revise their budgets to ensure adequate cash flows.
Mr M Shaik-Emam (NFP) welcomed efforts to improve procurement processes. He also commended Ministers for flying in economy class and suggested that preference should be given to the country's own airline, SAA, when bookings were made. He liked the idea of compulsory third party insurance as a way of solving the financial problems at the Road Accident Fund (RAF). The fund should be run by the private sector. To solve housing shortages, he suggested that overseas investment should be sought.
Ms D Peters (ANC) referred to calls by an association of old-age pensioners for the payment of a 13th cheque at the end of the year. She asked whether space for this could be created by trimming monthly pension payments. On the RAF, she wondered how much of a fuel levy increase it would take to eradicate the fund’s payments backlog. She asked whether the Office of the Chief Procurement Officer had the capacity to ensure that service providers guilty of wrongdoing were not awarded government contracts. To reduce litigation against the government, it was necessary to ensure public servants were made to pay if they were negligent.
Ms P Abraham (ANC) asked whether there were engagements between the Minister and the labour movement at the Nedlac negotiating forum. She was concerned about the shifting of funds between government entities. She feared that money was taken from poorer provinces to pay for the sins of richer ones. She was also concerned about foreign nationals opening businesses in townships. There was a need to “take back the economy.”
Mr I Morolong (ANC) welcomed the tax relief given to poorer taxpayers. It should have a positive impact on spending and economic growth.
Mr D Joseph (DA) referred to the funds allocated for outstanding land claims. Why was this restorative justice process taking so long? Further, he noted that the contingency reserve fund was allocated R15 billion over three years. Were there restrictions on how it could be spent? Could it be used for bailing out state owned enterprises?
Mr G Hill-Lewis (DA) noted that Treasury spoke of the need to stabilise debt. However, in spite of spending cuts, the Budget failed to do that. He questioned the credibility of the proposed wage cuts. Trade unions had called this a declaration of war. Was a cut of R160 billion achievable? He found the allocation of R16 billion to SAA “most disappointing.” Referring to plans to improve the rail system, he asked Treasury to comment on calls by the Gauteng and Western Cape provincial governments for the running of rail services to be devolved to them.
Mr D Ryder (DA) said it was imperative to ensure that the forecast deficit of 6.8% of GDP was the absolute maximum. He asked for clarity on the implementation of district development models, saying this could not be done on a “one size fits all” basis. He wished to raise the “elephant in the room” - the issue of the Gauteng e-tolls. When would an announcement be made?
Mr G Skosana (ANC) said the economic outlook was very bad. It would require huge sacrifices to turn it around. Instead of cutting the wage bill, would it not have been better to freeze wages for three years?
Adv S Swart (ACDP) said the National Treasury had been “very frank” about the dire economic situation. He welcomed the allocation of additional funds to the National Prosecuting Authority and the Asset Forfeiture Unit. They could recover tens of billions of rands. In addition, SARS had debt of R80 billion on its books. Recovery of this could help balance the Budget.
Mr W Wessels (FFP) congratulated the Minister and National Treasury for doing well under difficult circumstances. He welcomed the fact that there had been no rise in personal income tax rates. Every budget over the years had over-estimated the growth rate. Did current forecasts take into account “black swans” such as the corona virus and unpredictable load shedding? On cutting the public service wage bill, he asked whether there should not be a moratorium on performance bonuses. On cutting the cost of public servants air travel, he pointed out that booking agencies charged more to procure tickets than would have been paid by individuals buying the tickets themselves. He welcomed the Minister’s reference to compulsory third party insurance.
Mr F Shivambu (EFF) said he did not know what the Minister sought to achieve with the budget he had delivered. What economy had ever been saved by austerity measures? Where was the economic logic in stifling employment and growth? There was large-scale tax evasion by the corporate sector through the use of transfer pricing. What was being done to collect taxes from e-commerce? The EFF believed African Bank should become the nucleus of the proposed state bank. Some cost-cutting measures were “just aesthetic.” Ministers flew economy class, but were picked up by big expensive cars at the airport.
Mr Y Carrim (ANC, co-chairperson) said Parliament was not exercising its oversight role effectively in holding government departments to account. For several years, the issue of illicit financial flows had been raised in Parliament, yet “we don’t see a single person in orange overalls.” He called for the establishment of an inter-ministerial committee to deal with the matter.
Mr M Maswanganyi (ANC, co-chairperson) questioned the proposal to allow municipalities to buy electricity from private sector producers. Eskom owned the electricity grid. If private producers had to do their own distribution, how affordable would their electricity be?
Minister Mboweni replied that there had been discussions with unions about the proposed wage bill cuts. The issue had been raised at meetings of the leadership of the tripartite alliance. He and the Minister of Public Services, Senzo Mchunu, had had conversations with some trade union leaders and there had been discussions at Nedlac. The announcement of the proposed cuts had not come as a surprise.
The Minister said the Budget would contribute to growth in various ways by promoting agriculture and tourism, refurbishing industrial parks and development zones and supporting the motor industry. Efforts were being made to attract foreign direct investment through the appointment of investment ambassadors by the President and by using embassies to promote the country. However, there had to be a change in mindset. When Pepsico wanted to acquire a South African company there had been an outcry.
There was a need to build capacity in the Office of the Chief Procurement Officer to deal with “unbridled” over-pricing and exploitation of the state.
Transferring money between government entities was a difficult matter. When money was not spent, the correct procedure was to withdraw it. But the people for whom it was to have been spent still remained. A new approach was to help municipalities spend money effectively.
The proliferation of non-South African township traders was “a serious business.” These traders should be required to register and obtain licences to operate. In order to register they would have to have a bank account.
On debt stabilisation, the Minister said it was necessary to contain costs such as those associated with medico-legal litigation and procurement. There had to be better control of “big-ticket items” like SOEs.
On the pensioners’ call for a 13th cheque, the group had in fact delivered a demand to National Treasury for a monthly pension of R2500 plus a 13th cheque. It would not be right to trim monthly pensions to pay a 13th cheque. However, when economic times were good, a once-off payment to pensioners could be considered.
Mr Mogajane said performance bonuses were not included in the planned cut of R160 billion in the wage bill. On requiring officials to fly SAA, he said care would have to be taken to ensure that this did not flout competition laws.
There were focused programmes at National Treasury to support municipalities to spend funds effectively. The concept of a district development model was being rolled out slowly and lessons would be learnt as this unfolded.
Mr Mogajane said debt levels were not stabilizing, but increasing. On the wage bill, he said the narrative about it had become distorted. The proposal was not to cut wages but slow down the rate of increase in the wage bill. Pay increases would be lower than they had been historically.
Mr Edward Kieswetter, SARS Commissioner, said SARS’s capacity had been severely weakened over the past years. It had lost 200 people in the debt collection division and 700 in the auditing department. It had R170 billion in debt on its books, of which about R35 billion was disputed. There was a need for audit work to eliminate artificial debt from the books.
SARS was aware of transfer pricing and other mechanisms used by multinationals to avoid tax. This was being addressed by limiting the amount of interest deductions and by boosting SARS’s capacity to detect abuse. E-services were already being taxed.
Mr Kieswetter highlighted abuse of the VAT system. SARS had detected 600 companies that had been established purely to exploit the refund system. Two Cape Town businessmen had recently been convicted on 8 000 counts of Vat fraud and were sentenced to effective jail terms of 15 and 16 years.
Dr Mampho Modise, DDG: Public Finance and Acting: Economic Policy, National Treasury, said the fuel levy would have to be increased by 50 cents to deal with the RAF’s shortfall.
The effects of the covid 19 virus had not been factored into economic forecasts at this stage. However, load shedding had been taken into account. Devolving rail management to provincial governments would be “a good thing in a perfect world.” For now, an administrator had been appointed to run the Passenger Rail Agency of SA (PRASA).
On the SAA allocation, Ms Tshepiso Moahloli, DDG: Asset and Liability Management, National Treasury, explained it dealt with “legacy debt.” Loans had been guaranteed by the government and the lenders now wanted to be paid.
Ms Moahloli said work still needed to be done on the proposed sovereign wealth fund.
Mr Maswanganyi asked why it had been included in the Budget if feasibility studies were still being done.
The Minister gave an assurance that there would be a fund with capital of R30 billion.
Mr Maswanganyi thanked the Minister and officials for their participation.
The meeting was adjourned.
Buthelezi, Mr S N
Carrim, Mr YI
Mahlangu, Ms DG
Maswanganyi, Mr MJ
Abraham, Ms PN
Buthelezi, Mr EM
Du Toit, Mr SF
Hill-Lewis, Mr GG
Joseph, Mr D
Mabiletsa, Ms MD
Masondo, Dr D
Mboweni, Mr T
Mkiva, Mr Z
Mlenzana, Mr Z
Morolong, Mr IK
Njadu, Mr EJ
Nkomo, Ms Z
Peters, Ms ED
Ryder, Mr D
Shaik Emam, Mr AM
Shivambu, Mr F
Skosana, Mr GJ
Swart, Mr SN
Wessels, Mr W
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