Medium Term Budget Policy Statement: hearings

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Finance Standing Committee

12 November 2003
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Meeting report

FINANCE PORTFOLIO COMMITTEE, FINANCE SELECT COMMITTEE; JOINT BUDGET COMMITTEE: JOINT MEETING
13 November 2003
MEDIUM TERM BUDGET POLICY STATEMENT: HEARINGS

Chairperson:
Ms Hogan (ANC) & Ms Mahlangu (ANC) & Mr Nene (ANC)

Documents handed out:

Medium Term Budget Policy Statement
Presentation by the National Treasury
Minister of Finance speech to National Assembly on MTBPS on 12 November 2003

National Treasury and SARS team: Finance Minister Trevor Manuel; Mr Ismail Momoniat (Acting Director-General); Mr Lesetja Kganyago (Head: Economic Policy and International Financial Relations) represented the National Treasury; Commissioner of the South African Revenue Services, Mr Pravin Gordhan.

SUMMARY
A briefing was given on the Medium Term Budget Policy Statement by Treasury with the Minister of Finance and the Commissioner of the South African Revenue Services present.

The discussion focused mostly on macro-economic issues such as GDP growth, the trade deficit and the declining supply side. Other issues like the roll out of anti-retrovirals and tax incentives were also discussed.

MINUTES
Introduction by Minister of Finance
Minister Manuel remarked that it is important that one locates the Medium Term Budget Policy Statement within a global economic environment that is decidedly different from earlier periods. It is important to pause and recognise just how different this world is. It is a world which contains currency volatility and the bulk of that volatility obtained between the US Dollar, the Euro and the Yen. He mentioned the billions of Dollars the Japanese Treasury has lost in an attempt to keep the levels of the Yen repressed. This volatility is impacting on the huge balance of payments crisis which is growing in leaps and bounds in the United States. It is impacting on the financial relations between the US and China. It is also impacting on the commodity cycle so that one is seeing similar trends in the Australian Dollar, the New Zealand Dollar, the Canadian Dollar and the South African Rand because these are commodity producing counties.


That scenario has an impact on a series of other issues. Uncertainties have continued to plague the global economic environment and large economies have had serious problems. The world economy depends on the US economy. The US economy showed very strong growth in the third quarter of 7.2%. It is unlikely that they can sustain such growth as they are sitting with a fiscal deficit that is now approaching 6% of GDP and balance of payments deficit. Between those there is a very strong basis for macro-economic instability.

To this picture one has to add the other realities of the current world. The war in Iraq is costly. It is costly both in financial and political terms. The US Senate last week approved an additional $87 billion of expenditure in Iraq. This adds to the deficit, creates macro-economic instability, changes demand patterns for capital. The politics of the US will be impacted. The number of body bags and injured soldiers returning will have an impact. In a world as integrated as the one we live in we need to understand that this will have an impact on us. The effect of SARS impacted on travel plans. Movement of people in general has changed. There is all round a sense of uncertainty that has not permitted decision makers to extricate themselves from an earlier period of uncertainty.

One could spend a long time talking about these issues, but unless we have a view of the global economy it is very difficult to develop a perspective on that which shapes this team (Gordhan, Momoniat and Kganyago) and those who support us in the fiscal frame described in the Medium Term Budget Policy Statement.

Treasury briefing on MTBPS
Mr Kganyago and Mr Momoniat presented to the committee. The following are additional comments to the presentation (see document). Some of the slides were not discussed.

Slide 9: The current account deficit of 1 % is sustainable and is not putting any constraint on growth. They have found that world demand has a bigger impact on South African exports rather than the effect of the exchange rate.

Discussion
Ms Tsheole (ANC) commented on the increase in the allocation to provinces for social services. She asked whether the formation of the Social Security Agency (which means that provinces are no longer going to pay out the grants) was taken into consideration. Is the allocation going to be reduced or is the money going to be paid back to the agency?

Mr Durr (ACDP) asked about the extended amnesty. Is that because of the success they are enjoying or is it because of technical problems that are slowing them down. Would it be possible to give the Committee a ball-park figure on the kind of money expected? Can it at this stage be described as a success? He commented that it looks like it will be worthwhile in financial terms.

Dr Odendaal (NNP) asked for more detail on the proposed reviewing of the tax on retirement funds and allowances for start-up expenses that we have for business (tax stimuli).

Dr Rabie (NNP) mentioned the tax stimuli for urban development in 15 municipalities. Will that be extended beyond those 15 municipalities?

Minister Manuel replied that the Social Security Agency was not taken into account. There is an enormous risk in managing all the data. There are 7 million recipients at the moment. The database carrying that is a risk. If the data is transported and there is any spillage we would face enormous difficulties. The transfer will have to be managed over a period of time.
On the amnesty he said that the start was a bit slow. They are currently receiving 300 applications a day. By the end of last week just fewer than 5000 applications were received. The processing of all these applications takes a lot of time. It will probably take longer than the extended deadline. It is impossible to guess figures. The staff of the unit was increased recently and it will probably happen again soon.

Mr Gordhan commented on the tax review of retirement funds. The review is a work that has been in progress for a while. There has been active consultation and further documentation and papers has been developed. The review does not mean that there will automatically be changes. If changes are ready they will be announced by the Minister. On the start-up expenses he said that it is current legislation. The legislation contains a provision that enables businesses to have double deductions not exceeding R20.000 for their start-up costs. That should kick in by the end of the year.

Mr Manuel replied to the question of the urban renewal zones. There are a series of issues that needs attention. There are areas in cities that are deeply run down. This was the object of the incentive proposed. The local authorities would sometimes have other areas in mind and this could undermine the taxpayers. He stressed that he is not in a position to answer in detail. It is still early in the process and in a couple of months they will be in a better position to be able to see how much wider they can go. A framework, norms and a set of performance criteria is needed for local authorities around this issue.

Ms Hogan asked what is envisaged with the Municipal Infrastructure Grant.

Mr Momoniat replied that currently there are too many small grants with lots of heavy conditions. The idea when cabinet approved this grant is to phase out all the others and that the new grant with lesser conditions. This grant should assist the capital budgets of municipalities. It could be used to upgrade townships and roads for instance.

Ms Hogan remarked that when the money is divided by the 284 municipalities it comes to a small amount. Is it going to be divided according to the size of the municipalities?

Mr Momoniat replied that we are looking at a figure of about R5 billion. The idea down the line is to divide this so that it supports poorer municipalities. There is an interdepartmental committee which is investigating a formula for the allocations. The fairest way to divide is to take the six metros and 45 districts and divide it between them. Then they will look within how it will be divided to the municipalities.

Ms Mahlangu asked about the issue of administered pricing. She remarked that the Governor of the South African Reserve Bank has often stressed this issue when he appeared before this committee. She stated that municipalities are culprits, besides big corporations. She mentioned the rate at which municipalities increase salaries. She asked whether these factors will be looked at across all government departments or only the big corporations like Transnet and Eskom.

Mr Zita (ANC) asked which sectors of the economy have showed a decline as our revenue yield is declining.

Mr Moloto (ANC) stated that there is a vast difference between foreign direct investment and portfolio investment. Is this a general pattern among developing countries? He also enquired what is happening with the supply side of our economy.

Ms Joemat (ANC) asked about the balance of payment. In 2002/3 there was a surplus and now we the forecast is a deficit of 1% of the GDP. What is the projection for the future? Will there be a surplus again?

Dr Koornhof (ANC) commented that one of the major achievements of this budget, which sometimes goes unnoticed, is the declining interest on public debt which has been achieved in the last couple of years. It has declined from 6.4% in 1998 to a projected 4.1% in 2006. He drew attention to the figures of the 2001 Census which shows a big influx of people into the Gauteng and Western Cape provinces. Is the question of urbanisation being addressed? The continuous inflow of people should affect budgets and allocations.

Minister Manuel commented on administered prices. He said that if one looks at the Monetary Policy report released by the Reserve Bank last week and look at the contributions to administered prices there are some that say it is outside the sphere of influence of government. For example the Health Professionals Council has recommended rates for General Practitioners. That price is deemed to be administered and it is a component of health cost. The government does not set that price. You will find that across the health and educational sectors. The debate is whether they are really administered prices in the true sense of the word.

Most importantly, in respect to administered prices, we need to ask what the regulators and supervisors allow for in certain circumstances. What we saw with the National Energy Regulator and the 2.5% increase that the awarded to Eskom last week is indicative of some of the changes we might see from now on.

On which sectors have been declining he remarked that the revenue policy that has been followed over the last couple of years led to a shift from personal income taxes and indirect taxes like VAT towards company taxes. Company taxes are linked to profitability and currently we are in an environment of low profitability. The graphs in the presentation clearly show that the manufacturing sector is declining although there are indications of a turnaround. It is however more important to understand the environment than looking at the specific sectors to understand the impact on our revenue yield. He commented that we are taking all the notions we had about society to a new level. We are signalling our endeavour to get people trained. We are recognising poverty and are not taking glory in the fact that a lot of people are living on welfare.

Dr Woods (IFP) asked about the revenue yield for the current year which is a bit lower than hoped for. This has been attributed to lower corporate profits and the international economy. Does it no also have something to do with the stage that the commissioner has reached in eliminating inefficiencies? In your revenue estimate exercise across the three years have you taken other considerations into account?

Mr Gordhan replied that it is important that we look at the estimation exercise that has two broad components. The first is the range of macro-economic factors, which affects about 95% of the estimate and the second factor is tax gap initiatives. These are thing the government will do to bring in additional revenue. What had to be downscaled is the macro component. Customs duties for example has been downgraded by R2 billion. The revenue estimates exercise is an ongoing process and SARS is not yet a fully effective organisation. The building process will continue for many years to come.

Mr Kganyago replied to Mr Moloto's question on the supply side. He stated that we are still seeing a robust gross domestic expenditure and at the same time the supply side is lagging behind. The general global slowdown contributes to that. From an economic perspective supply takes time to respond.

Minister Manuel confirmed that they are mindful of the census figures of 2001 and its social implications. The allocations to local authorities are made according to a formula which has a strong demographic component. The index used is the number of poor people in a district. The number of families earning less than R1100 will determine the allocations.

Dr Odendaal asked about the graph on page 3 of the Medium Term Budget Policy Statement where the IMF is forecasting a GDP growth of up to 6% for developing countries. Why is the Minister only forecasting a 4% growth where we need a 6-7 % to combat unemployment? If we teach our citizens skills what will happen when our economy does not grow fast enough?

The chairperson asked about the proceeds of restructuring. Initially the forecast was R13 billion and now it is down to R5 billion. She also asked about the increases in foreign loans. Are we still comfortable with the amounts?

Ms Mahlangu asked whether they are sure about the capacity of provinces to roll out the anti-retrovirals.

Minister Manuel commented on the issue of growth. Growth in Sub-Saharan Africa is much lower than other developing nations. You have to bear in mind that the developing countries include China and India who are growing very quickly at the moment. These are markets with over a billion people which provide more opportunities than smaller developing economies. We have a lower level of skills at the moment and in South Africa there is a large imbalance. The production of skills takes a long while. He mentioned the example of Korea who invested heavily in human resources. The minister emphasised that in 1953 H. F. Verwoerd stated that the Bantu does not need to learn mathematics or science. This has created a profound deficit of the necessary skills in students and in successive generations of students and we are still playing catch up. That distinguishes us from the other developing countries.

Mr Kganyago replied to the question on restructuring. The revision of the figure is mainly due to the restructuring of Telkom and Transnet. Foreign loans are mainly driven by what is happening with the export credit facilities.

Mr Momoniat commented on the roll out of anti-retrovirals. He stated that the challenge we are facing is to make it work. There is no precedent for the roll out. Some provinces will probably take off faster than some of the others. Gauteng and the Western Cape have better capacity and have been gearing up for the roll out. We will have to see how fast the provinces take up the roll out and then we have to take it from there.

Mr Manuel emphasised that all the funding remains across the full spectrum. We have to remember that anti-retrovirals is not a cure. There is no cure. We have a responsibility to spend the bulk of our resources on people who are not infected by the HIV-virus. That then becomes a very strong rational approach. The approach recognises that anti-retrovirals only work under certain circumstances. To administer the drug you need to realise that you are not in a pharmacy waiting for aspirin. We need very strong educational inputs and the medical personnel have to be thoroughly trained. You need good laboratory facilities and nutritional support for the drugs. All of that requires a change in the capacity. The task team will look at all of these factors together.

The meeting was adjourned.

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