2020 Revised Fiscal Framework: Treasury response to public submissions

Meeting report

The Chairperson announced the public hearings for the Division of Revenue on 14 July and Appropriations Bill on 24 July. He acknowledged complaints received from C-19 People’s Coalition Economic Working Group and others about the lack of time provided for drafting submissions. C-19 has been invited to present at the Appropriations Committee public hearing on 10 July 2020 on the 2020 Division of Revenue Amendment Bill.

National Treasury response to public submissions
Mr Dondo Mogajane, National Treasury Director General, stated that Treasury strongly supports public engagement on the Adjustments Budget tabled by the Minister of Finance on 24 June 2020. However, Parliament should not be deceived and misled. Although the Committees are a public platform, the Committees should not be used to advance false and politically self-serving motives by some groups outside of Parliament and government. Treasury is of the view that the submissions made by the Budget Justice Coalition (BJC) and the group of economists are empirically false and misleading. They are also adopting a tone of attack and dismissiveness which seems to reject the principle of social partnership in favour of media sensationalism. The submissions contain several inaccurate assertions and false assumptions seemingly made to deceive the Committees. The groups also seem eager to launch baseless and politically motivated attacks against the Minister of Finance and Treasury. In its submission, the group of economists states that the budget takes away from what the President announced.

Mr Mogajane pointed out that the budget is in line with the President’s directive. Government’s focus on reprioritisation should be seen as a good initiative to target low-efficiency and wasteful expenditure, and should be applauded as such. Unfortunately, the Parliamentary Budget Office (PBO) has also fallen into the misguided view that spending should be increased on a net basis, by R500 billion. The Budget Justice Coalition and the Economists Initiative state that “it would be a derelict for Members to vote for the budget”, which is an attempt at manipulation without empirical evidence. The BJC claims Treasury has “little understanding of the state’s constitutional obligations”. No data is provided to back the claims, which are political statements showing that the groups do not like the allocations. There are several other inaccuracies by the two groups, and deliberate ignoring of key statements in the budget, for instance on the job protection measure. Parliament should be wary of allowing itself to be used as a platform for inaccurate statements.

The budget raises government spending in response to the COVID-19 pandemic and it allows for the unsustainable expansion of the budget deficit as it responds to changes on the ground. The health budget is higher than what was announced in April. Government is exercising its responsibility to ensure sustainability and prevent a collapse in the public finances South Africans depend on. Treasury is not reckless and calls on social partners to make meaningful contributions.

Mr Y Carrim (ANC, KZN), Select Committee Finance Chairperson, replied that robust discussion is allowed. The Director General's statements, alluding to Members of Parliament being misled as though they are naïve, are offensive. The Director General has no right to suggest that Members will be used by civil society or anyone else, including Treasury. There is nothing wrong with economists being political, as it is a political terrain. The statements made were bordering on insulting the Committees.

Mr Edgar Sishi, National Treasury Acting Head: Budget Office, listed the organisations and individuals who made submissions on the Supplementary Budget. He pointed out key comments during the public hearings on the debates on austerity and stimulus, on tax policy, spending, reforms and financing. South Africa’s fiscal stance has been expansionary for more than a decade at an average of 4% annual increase since 2008 in real terms and the Supplementary Budget presents the most expansionary budget in many years. It contains an unprecedented expansion of the fiscal deficit and increase in borrowings. This expansion, which is 10% of Gross Domestic Product (GDP), is larger than comparable countries in the G20. It provides one of the most robust responses to the COVID-19 pandemic among developing countries.

Higher government spending has not translated into higher growth in the past decade. Treasury believes that the austerity versus stimulus debate is a false choice, and that it does not make policy according to this paradigm. Reprioritisation is a prudent and appropriate approach to funding part of the relief measures that were announced by the President on 21 April 2020. This is in line with the practices in numerous countries worldwide. Lastly, it provides an opportunity to address waste and reduce non-priority spending in government.

Treasury’s observation about the submissions is that the rejections of the 'active scenario' ignore the prospect and implications of a debt crisis. The calls for more government spending are based on the incorrect assumption that South Africa suffers from short-run cyclical demand challenges rather than long-run structural weaknesses in the economy.

Government is in a weak fiscal position, and the COIVD-19 pandemic exacerbates this. A structural increase in the level of spending must be matched by an increase in structural revenues. On the austerity versus stimulate debate, government only has a choice between a looming debt spiral and fundamental reform. No other option exists. It is not about spending more but it is about strengthening fiscal buffers. The main budget gap between revenue and expenditure is structural and widening. The expected Budget 2020 deficit has increased from 6.8% of GDP to a record 15.7% consolidated budget deficit. The gross borrowing requirement for 2020 has increased by R344.2 billion to R776.9 billion. Additional spending will require higher debt, which comes with higher interest rates. Rising debt service costs are crowding out our ability to pay for health and education services and to take care of the vulnerable through social programmes. Government’s structural reforms to address these challenges are in the document titled Economic Transformation, Inclusive Growth, and Competitiveness: Towards an Economic Strategy for South Africa.

A concern raised in the public submissions was about the use of the Government Employees Pension Fund (GEPF). Treasury has no plans to use the GEPF to fund the response, as forcing the Fund to invest in suboptimal assets will create a significant long-run liability for future generations.

Treasury’s interventions to support public infrastructure spending were outlined (see document).

On tax policy, the 2020 Supplementary Budget stated that there would be tax increases of R40 billion over the next four years to help stabilise debt and that the specifics of the tax increases will be announced by the Minister of Finance in the 2021 Budget. All the additional proposals on tax measures are useful and will be considered before the 2021 Budget. He noted in its submission, the Economists Initiative has confused the R70 billion in actual tax relief with the R26 billion in direct cost to the fiscus outlined in the budget review.

In response to comments that there has been little uptake on the tax relief measures, Mr Sishi supplied data from SARS on the utilisation of these measures.

The four main elements of critical structural reform were outlined. The challenges of increased borrowing and the financing of the increased gross borrowing requirement for 2020/21 was discussed as was weak state of finances of the State Owned Companies (SOCs) and the planned SOC reforms.

Mr Sishi highlighted that the President’s social relief and economic support package announcement was not reneged on or rejected. Although the initial announcement by the President on reprioritisation of the existing budget was R130 billion, subsequent shifts in departmental spending needs for Covid-19 as well as existing non-discretionary spending commitments meant that only R100.9 billion could be adjusted. The R100.9 billion has therefore been repurposed for Government’s Covid-19 interventions as part of the fiscal relief support package. Suspended funds were reprioritised meaning that the purpose of the spending was revised from what it was initially intended for in Budget 2020 to support Covid-19 interventions in frontline departments such as health and social development, as well as in provinces and municipalities in line with the President’s announcement. The Supplementary Budget is focused on COVID-19 not on any other sectoral issues including gender based violence; there will still be another adjustment budget in October. Regarding the division of revenue, Treasury highlighted its support to municipalities for the pandemic, and efforts to improve spending efficiency and reduce waste.

Mr Carrim requested Treasury to be more specific on the issues raised by stakeholders.

Dr Duncan Pieterse, Treasury Acting Head: Economic Policy, stated that a number of submissions argue that additional spending can boost economic growth. He pointed out that government spending has increased from 27% of GDP in 2009 to just over 32% in 2019, without the necessary change in growth. The additional spending would have to be financed through debt. International research shows that unsustainable spending leads to higher debt and is associated with low growth. In a small economy like South Africa’s, each rand of spending can have a growth impact of zero or sometimes negative. South Africa’s fiscal multipliers are very small and were even negative before the crisis. Negative fiscal multipliers mean that additional government spending can lead to negative growth. This applies to South Africa given its current debt levels. Additional spending raises aggregate economic risk and debt. South Africa’s risk premium has increased from 3% at the end of 2019 to 5% now.

Treasury agrees with the structural reforms submitted by the Congress of South African Trade Unions (COSATU) and other stakeholders on structural reforms and creating an enabling environment for private sector investment. The private sector contributes 60% of investment. Debt stabilisation will require removing structural constraints to growth, such as affordable and reliable electricity supply. A reform would be leveraging renewable energy resources to create jobs, lower prices and stabilise electricity supply.

Comments by public participants
Congress of South African Trade Unions (COSATU)
Mr Matthew Parks, COSATU Deputy Parliamentary Co-ordinator, agreed that the debt trajectory is worrying and COSATU has been raising concerns about it for some time. COSATU differs with government on how to resolve the crisis. Government needs to stimulate the economy to create jobs and increase revenue. Cutting spending without stimulating the economy will end up choking it. COSATU has looked at examples within the EU, US and China who have taken the stimulus route. Unemployment is at 40% and may reach 50% with the recession. From the budget, COSATU only gets a sense that the wage bill will be tackled and expenditure reduced, there is no job creation target in the budget or response to retrenchments in SOCs.

COSATU wanted to hear more about tackling wasteful expenditure and corruption, customs enforcement and impact investments. Anything less than a R1 trillion stimulus will not do. COSATU supports infrastructure projects with a focus on ports and rail. There has been no movement on departmental reforms such as digital spectrum and water licensing. There are no clear plans to resolve SOCs and one needs to see much more than the movement in Eskom. It would have been nice to see reductions in salaries of management in government as well.

C-19 People’s Coalition Economic Working Group
Mr Ihsaan Bassier from the C19 People Coalition stated that the C-19 Subgroup which focuses on cash grants has identified that the cash transfers allocation in the budget is insufficient at the moment. The Coalition agrees that the debt trajectory is important; however, the budget priorities should be humanitarian. Globally, there needs to be a reprioritisation of short-term humanitarian interventions with long-term ones. This will require a trade-off along the five-year horizon. South Africa’s data shows short-term effects. The COVID-19 moment means investor response to debt is different. There is a temporary increase in debt and where the debt spending goes is important. The Coalition is against cutting of grants and agrees with COSATU on seeing more of a sacrifice across the board, with higher income earners taking on the burden as well.

Accountability Now
Mr Paul Hoffman expressed disappointment with the lack of information on the effect of corruption on the state’s ability to acquit itself of its responsibilities under the Constitution. Current spending is 62 cents on the wage bill and 22 cents on servicing debt. Government spending has been used to feed grand corruption in the country, which is responsible for R1.5 trillion falling into the hands of the corrupt. Grand corruption needs to be addressed to avoid falling into a debt trap. Investments will not grow if investors lack confidence that the rule of law is intact. Accountability Now raises two points: hunger and the proposal of a basic income grant. The wastage of edible food needs to be stopped. Luthuli House is engaging on the feasibility of a basic income grant. The state needs to be proactive about raking back the R1.5 trillion lost to corruption.

Organisation Undoing Tax Abuse (OUTA)
Mr Matt Johnston noted a primarily defensive response from National Treasury. OUTA’s recommendations are mostly in line with Treasury’s plans. He asked if Treasury is engaging with departments, SALGA and the municipalities, on the reshaping of their budgets. What are the plans for restructuring and revolutionising the roles of SOEs to metropolitan government? What are the budgeting plans for municipalities to purchase electricity directly from independent producers? What about the Competition Commission recommendations for PRASA? What are the plans for addressing systemic waste in all departments? OUTA supports the Public Procurement Bill. He requested clarity on how the statement on focusing on renewable energy will be aligned with actions – as money has been added to nuclear energy instead of renewable energy. He asked for a response to the concerns raised about the Police and Defence Department. OUTA strongly believes that debt stabilisation requires reforms.

Budget Justice Coalition
Ms Busi Sibeko stated that the relief package is insufficient and does not preserve the economy. On Treasury's claim that government’s response is not austerity, she pointed out that the budget has been expanding due to debt servicing costs. The BJC calculations found a net-cut of R48 billion to non-interest spending. She disagreed that South Africa’s fiscal multipliers were negative or zero pre-COVID. In 2019, the fiscal multipliers were 1.7. The Institute for Economic Justice calculations of the multipliers were also above 1. She requested more evidence on the claim that the multipliers have deteriorated to zero or a negative figure within a few months. It is not about spending more money, but how increased spending is used to drive the economy. Spending on poor people through grants has high multipliers due to the high marginal propensity to consume (MPC) of poor people. This helps domestic markets, protects the lives of these people and progresses human rights. BJC welcomes the tax increases and hopes the taxes will not be regressive.

Mr Daniel McLaren agreed that this process needs to be done with humility as it is an unprecedented time. There are a lot of ideas on the table for government to consider. The country needs a government that is more receptive to the ideas. There needs to be more opportunities for engagement between stakeholders and executives on the budget. BJC has made proposals and would like a response from Treasury on the proposals. BJC is concerned with the quality of services on the ground and with government’s choice of an austerity approach to a crisis, which has not worked anywhere else. It is concerned that Treasury is blind to the impact of budget cuts on poverty and inequality. Treasury’s language of short-term harm underplays the extent of the damage caused by these policies.

Fiscal Cliff Study Group
Mr Fanie Joubert stated that the focus of the Group is on fiscal sustainability. The Group notes the structural low growth experienced in South Africa and requests greater focus on the impact of this on state revenue. The Group takes note of the negative fiscal multipliers. He highlighted that civil service remuneration, social payments and debt service costs will absorb 100% of the budget for the remainder of the year.

South African Institute of Chartered Accountants (SAICA)
Ms Sharon Smulders said that the 24% tax to GDP ratio mentioned earlier does not match the figures SAICA has. She asked for clarity on why the Pay As You Earn (PAYE) deferrals declined from April to May, given the current circumstances. There is no accountability and a unified government is required. There cannot be another set of qualified audit reports like the local government 2018/19 audits released on 1 July. She agreed with COSATU’s view for more private sector investment to stimulate the economy, and not just investing but job creation. The budget does not mention the spending on SOC bailouts and the failing water and sewage infrastructure. The GEPF should not be exposed to investment risk. Government’s guarantees need to be relooked at. Lastly, the revenue estimates seem unrealistic.

Mr Peter Meakin
Peter Meakin said Treasury has not referred to the Minister of Finance statement made two years ago, to replace income tax with land tax. The Committees must find out what is going on with this. The 2019 MTBPS said income tax was insufficient, which is enough to suggest that it should be looked at. The average South African family’s cost of living has increased through income tax and VAT by R17 000 per annum.

Dr Stephen Greenberg
Dr Stephen Greenberg, researcher on agroecology and food systems transitions, noted that he represented more than 40 civil society organisations in the land and agricultural sector. He asked why the defence and police budgets have increased by over R5 billion, while the agriculture budget has been cut by over R3 billion, specifically targeted at local production activity, food security support and local land reform. The organisations are calling for a return of that money so that people can become part of the economy.

Parliamentary Budget Office (PBO)
Dr Seeraj Mohammed replied to the Director General’s opening remarks by saying that that data can be interpreted in many ways. Presenting people’s views as though these views are not fact-based is incorrect. There are different approaches to economics. Treasury’s approach is based on the economic view that high debt leads to lower growth, and there is no base for this in economic literature. The view is based on The view is based on contractionary expansion, which the IMF found to be empirically wanting. It is an argument that needs to be rethought. He agreed with the BJC response on multipliers, which is dependent on where and how money is spent.

Dr Dumisani Jantjies said that government should be careful of assumptions that there is an optimal debt level. Growth is important when looking at the debt-to-GDP ratio. The recovery from the global financial crisis (GFC) shows that the quality of expenditure is important for realizing growth.

National Treasury response
Dr Mampho Modise, Treasury Head: Public Finance, replied that with the reprioritisation and spending reductions project, Treasury first looked at what was announced by the President and identified that R130 billion would have to be reprioritised to fulfil the announcement. It identified four frontline departments that would require the reprioritised funding. The Supplementary Budget contains detailed explanations for reallocations in each department. Secondly, Treasury looked at how departments can remain functional, to avoid reducing spending to the point of preventing non-discretionary payments. Treasury is also looking at spending reviews to improve the efficiency of government spending.

Mr Christopher Axelson, Treasury Chief Director: Economic Tax Analysis, replied that the tax-to-GDP ratio was 26.4% going down to 23%. He requested SAICA check with the SARS preliminary data for more information on why there was a decline in PAYE deferrals from April to May 2020. The revenue estimates specifics are on page 34 of the budget. There is a big drop in tax-to-GDP, however it is reasonable.

Treasury did not agree to replace income tax with land tax. Instead it stated that it recognises the inefficiencies of land tax as highlighted by the Organisation for Economic Co-operation and Development (OECD). The Davis Committee also looked into this and raised valid concerns.

Ms Tshepiso Moahloli, National Treasury Acting Head: Asset & Liability Management, replied to concerns on funding the budget gap by saying that the budget explicitly states how the budget deficit would be financed using local and international funding and the cash at hand. All of these resources are being used to respond to the shock. Treasury is saying unproductive borrowing is bad and not necessarily that borrowing is bad. Government’s strategy has changed as it has not been borrowing from multilaterals. For the first time, multilaterals are now making resources available to respond to COVID, to ensure government responds to the objectives it announced. Investments have been affected by the downgrades and this needs to be reflected on. Treasury is in favour of deploying resources to productive sectors so that it eventually returns as an increase in revenue. Entities that have been relying on the state and not addressing their challenges for years are now crowding out entities impacted by COVID-19 which should be supported by government. Government needs to focus on the implementation of reforms and accountability in the fiscus-reliant entities.

Dr Pieterse replied that no one really knows what the fiscal multipliers are during the pandemic.

Dr Boipuso Modise, Treasury Acting Chief Director: Modelling and Forecasting, added that an IMF paper indicates that fiscal multipliers are lower in such an environment, given the current debt dynamics.

Mr Ismail Momoniat, Treasury Head: Tax & Financial Sector Policy, replied that Treasury is committed to fighting corruption and recovering funds from corruption. Recovering funds tends to go into a long complex process that requires the criminal justice system to work with Treasury. If there is a recovery, it is a stock that can be used for once-off investment or expenditure. It is not a flow that can be used to fund programmes.

Comments by Members
Ms M Mabiletsa (ANC) said that despite the challenging circumstances, Members have a duty to ensure the finances of the country are healthy and there is service delivery. Government needs to ensure it builds productive capacity in Small Micro and Medium Enterprises (SMMEs) and jobs must be created. The discussion needs to translate to ground work, otherwise it becomes a mere talk shop.

Dr D George (DA) was pleased there are no plans to use GEPF funds for suboptimal investments and asked if this would be applicable to private pensions as well. He agreed that there is no space for additional tax to be levied on the already suffering citizens. He asked what tax relief will be put in place for people who are forced to work at home. Treasury is silent on assisting individuals to access part of their pension fund. How is Treasury going to help them? He added that there is no reason there cannot be pension-backed loans that are wider than covering home loans, especially during the current crisis.

Mr F Shivambu (EFF) condemned the Director General’s opening remarks and described it as an aggressive and intolerant approach reflective of the current Minister, who does not want to receive criticisms coming from civil society. Parliament must have maximal freedom on discussions and not everyone must agree with Treasury in order to be tolerated. He raised concerns about the R500 billion relief package being presented to the public as though it is a fiscal injection, whereas it is a variety of measures including UIF, debt guarantees and tax deferments. Treasury’s orthodox ideological approach of reducing expenditure does not necessarily lead to being able to pay debt. If anything, reduced spending shrinks the economy. He pointed out that no clear plan has been presented on how to use the fiscus to stimulate the economy. There is currently a lack of direction in the philosophy and leadership of Treasury.

Mr G Hill-Lewis (DA) disagreed with the condemnation of the DG’s remarks by other Members. No one is entitled to more respect than the next person. If presenters are allowed to be robust with Treasury, then Treasury can be robust in its response. The DG was being reasonable, not rude and insulting. He will not take lectures on manners from the EFF. He asked for the likelihood of the 'active scenario' being realised, given the policy paralysis and lack of progress in fundamental reforms. Treasury is responsible for fiscal buffers. Treasury has agency in the fact that there is a failure to preserve fiscal buffers. The Minister and Cabinet committed to a primary surplus by 2023. Treasury will be held accountable for the fulfilment of the commitment. He agreed with the advice on the SOEs and was pleased with the commitment to stop funding SAA and the closing down of Alexkor. BJC’s accusation of Treasury being blind to poverty is an unfair statement. He thanked the Treasury for trying to avert a sovereign debt crisis in the country.

Mr D Ryder (DA, Gauteng) said he was pleased that there is a general movement away from prescribed assets. The presentation did not address some submission points such as the President reneging on his relief promises. The Treasury presentation does not give enough information to counter whether there has been a reneging of relief promises. The zero-based budgeting concerns were not replied to properly. The Defence budget has an unfunded organogram and it consistently receives qualified audits due to overspending. It does not have a way out. He noted the R2.8 billion increase in the Defence budget and the President’s 21 April 2020 deployment letter which added R2.5 billion to Defence department expenses. There has been a recent announcement of extending military deployment which will increase Defence expenditure by another billion. This raises concerns of how zero-based budgeting will be achieved in the short term, given the Department has expenses of about R6 billion, contrasted with a receipt of R3 billion.

Ms P Abrahams (ANC) said government needs to talk to infrastructure development in order to have economic growth. Treasury must mention which areas it is targeting for infrastructure development. She asked if Treasury is involved with the Solidarity Fund. If not, who is accounting for it? The Committees need to know the accountability parameters. The DG did not have to make such harsh comments in the beginning. The issue is not of capacity but attitude. It is not government alone who has the responsibility to grow the country, but civilians as well. Therefore, there should be no intimidation between government and civil society in this process. The DG went overboard and needs to correct that.

Mr I Morolong (ANC) said much of the UIF reserves are tied up in government bonds. Is this a way in which the government is trying to buy debt? The Minister of Labour said the UIF will stop paying out soon. How is that fair towards workers who have been making UIF contributions? Will it be used to buy debt?

Mr E Njadu (ANC, Western Cape) asked how the adjustment budget is being balanced in line with the reprioritisation of funds.

Mr Carrim highlighted that Members are aware of the dire circumstances and lack of funding. Everyone has to be modest as this is an unprecedented time with no guidebook or sense of certainty. Treasury does not have a monopoly over wisdom. It is not a question of being robust; it is a question of not telling Parliament what to do in respect of civil society.

He pointed out that this is a transitional budget, hence the use of the term Supplementary Budget instead of adjustments budget. The Committees will get more direction on where things are going with the Medium Term Budget Policy Statement (MTBPS) in October. Members cannot give conclusive views without a sense of where things are going and more detail.

There is a discrepancy in the public submissions and within the ANC between the President’s state-led growth path and private sector-led growth. To what extent is the budget reliant on the President’s path or to the other? He asked the public participants to submit the 500-word summary of their submission today.

Mr J Maswanganyi (ANC), Finance Portfolio Committee Chairperson, remarked that there are serious economic issues that need extraordinary measures. The Parliamentary Budget Office and Financial and Fiscal Commission have made recommendations that are worth considering and can assist in their recommendations to the National Assembly debate on 8 July. The GEPF and Regulation 38 will have to be looked at. The role of the South African Reserve Bank (SARB) was raised as a concern and should be discussed. The PBO has previously raised automatic fiscal stabilisers. The recommendations of the PBO, FFC and stakeholders should be taken seriously. Now is the time for the state to take the lead in the recovery of the economy. It has also been recommended that all government spheres table plans for revenue and expenditure enhancement. Arrangements must be made to ensure these plans are tabled before the Committees. He requested that the Finance Committees be privileged with the SOC reform plans. Zero-based budgeting must be seriously discussed, with empirical data and research-backed reasons. Government also needs to respond to the concerns raised about it. The draft Committee Report will be discussed by the Finance Committees on 7 July and adopted and will be presented the following day in the National Assembly.

Mr Hill-Lewis asked why Treasury is not responding to the questions raised by Members,

Mr Maswanganyi replied that Treasury had been given two opportunities to respond to the submissions before Members shared their comments. An additional response slot is not on the agenda and Members have the last say according to the agenda.

Mr Maswanganyi, in closing, thanked all Members, Treasury and stakeholders.

The meeting was adjourned.