2021 Budget: Treasury briefing, with Minister & Deputy Minister

Meeting report

Introduction to the presentation

Mr David Masondo, Deputy Finance of Minister, briefly introduced the presentation. He stated that the Minister had laid out the current state of the economy well (in the Budget), including the Country’s growth by 3.3 percent and its position in the global economy. The 2021 Budget intended to contribute to economic growth by doing the things outlined in the State of the Nation Address (SONA), through supporting the vaccine roll-out, economic recovery and structural reforms. There were also certain tax issues that the Team, led by the Director General would be able to take Members through. He handed over to the Director General (DG).

Mr Dondo Magajane, DG, National Treasury, presented the overview and introduced the team who would present.

Budget 2021: Renewing the economy and restoring public finances

Dr Duncan Pieterse, DDG: Economic Policy, National Treasury, presented the domestic economic outlook, recovery plans and outlined operation Vulindlela which aimed to accelerate growth reform.

Domestic economic outlook

- National Treasury projected real economic growth of 3.3 percent in 2021, from a low base of -7.2 percent in 2020. Growth was forecast to moderate to 2.2 percent in 2022.

- A successful vaccine roll-out was likely to boost domestic economic growth, enabling renewed trade and releasing pent-up demand. Conversely, a slow roll-out poses the most significant threat to economic recovery.

- The far-reaching COVID-19 economic impacts exacerbated the poor outcomes of the last decade.

- Broader structural reforms are required to entrench an economic recovery characterised by growing investment and job creation.

Recovery plan

Generating electricity:

Embedded generation regulation would be eased within three months; emergency power procurements bids as well as procurement of additional power in line with the Integrated Resources Plan 2019 (IRP) will be announced in the coming weeks. Electricity regulations were amended to enable municipalities to procure power from Independent Power Producers (IPPs). Divisional managers and boards of directors have been appointed to support the restructuring of Eskom.

Creating employment:

By the end January 2021, over 430 000 jobs of varying duration had been supported through the stimulus and an additional 180 000 jobs are in the recruitment process.

Supporting industrial growth:

Investments have been made to support production in the poultry sector (R800 million); in clothing, textiles, footwear and leather (R500 million); and in the automotive sector (R16 billion). In addition, large users of sugar have agreed to procure at least 80 percent of their supply from local growers.

Infrastructure rollout:

An infrastructure investment project pipeline worth R340 billion in network industries such as energy, water, transport and telecommunications has been developed. The blended finance Infrastructure Fund was preparing investments in student housing, digital communications, and water and sanitation.

Creating an enabling business environment:

In the past year, 125 000 new companies have been registered through the BizPortal platform, which makes it easier to register a business online. Transnet was taking steps to ease congestion at the Port of Durban and reposition it as a southern hemisphere hub. It had begun improving port access roads, increased skills and capacity, and expanded operating hours.

Operation Vulindlela: Growth reform implementation

Operation Vulindlela, a joint initiative between the Presidency and National Treasury, was focusing on a subset of key reforms:

- Fast-tracking the procurement of additional electricity, improving municipal distribution and reducing the administrative burden for embedded generation.

- Ensuring that households using analogue televisions switch to digital signals by March 2022 so that there is sufficient spectrum to meet demand.

- Finalising policy to enable the rapid rollout of 5G infrastructure.

- Expanding the electronic visa system and waivers to support tourism.

- Reviewing the regulatory framework and processes that make it difficult to import scarce skills, including finalising the critical skills list.

- Finalising the draft White Paper on National Rail Policy to improve freight and commuter rail services.

- Corporatising the National Ports Authority and taking other measures to increase the efficiency and competitiveness of the ports.

- Reviving the Green Drop and Blue Drop programmes to strengthen water quality monitoring.

Fiscal Strategy

Mr Edgar Sishi, Acting Head: Budget Office, National Treasury, presented the fiscal strategy of the 2021 Budget and South Africa’s fiscal position globally.

South Africa’s fiscal challenge was to balance the immediate need for support to the economy during the pandemic with ongoing efforts to close a large, pre-existing budget deficit. In this context, the fiscal strategy aimed to:

- Narrow the deficit and stabilise the debt-to-Gross Domestic Product (GDP) ratio, primarily by controlling non-interest expenditure growth.

- Provide continued support to the economy and public health services in the short term, without adding to long-term spending pressures.

- Improve the composition of spending, by reducing growth in compensation while protecting capital investment.

- Efforts to reduce growth in the public-service wage bill remain on course, with the Labour Appeal Court of South Africa confirming that the National Treasury must certify the affordability and sustainability of wage agreements prior to their implementation.

- Significant risks remain. The global outlook is highly uncertain, with the economic recovery largely dependent on responses to COVID-19. Several state-owned companies are requesting additional funding. Negotiations on a new public- service wage agreement are set to take place this year.

South Africa’s fiscal position: Global context

Over the medium term, debt-service costs were expected to average 20.9 percent of gross tax revenue. This was twice as large as the median for South Africa’s peer group over the period. Similarly, South Africa’s borrowing remains large by developing-country standards, and debt was projected to grow by 7 percent of GDP over the next three years.

Fiscal framework promotes economic recovery

Given the continuing pandemic, the fiscal framework provides short-term support to low-income households and funding for the health policy response. Changes since the 2020 medium term budgetary statements include:

- Three-month extensions of the special COVID-19 social relief of distress grant and the Unemployment Insurance Fund’s Temporary Employer/Employee Relief Scheme, and funding for the public employment initiative and for provincial hospitals in 2021/22.

- Up to R10.3 billion is provided for vaccine rollout for the current year and over the next two years.

- The contingency reserve increases from R5 billion to R12 billion in 2021/22, given uncertainty around vaccination campaign costs. These interventions do not add to longer-term expenditure.

Discussion

Ms D Peters (ANC) stated that in previous years the growth projections provided by National Treasury were very optimistic but had to revised down at a later stage. The Minister had announced that the economy was expected to rebound by 3.3 percent this year from a 7.2 contraction in 2020. Clearly, a ‘V-shaped’ rebound could not be expected in South Africa when partner countries in Brazil, Russia, India, China and South Africa (BRICS) were projecting rebounds higher than the rate of contraction. Why was South Africa’s economy not projected to rebound as strongly as the other developing countries? Can we trust that the National Treasury growth models were more accurate for this particular period?

Over the past few years the Country had Gross Domestic Product (GDP) growth below 2 percent and the economy was not creating enough jobs. At the rate presented, the National Development Plan (NDP) objectives of having unemployment and poverty eradicated by 2030, only had eight to nine years to be achieved. Why was it that the Country’s economy could not grow beyond 2 percent? What was the role of the private sector in working together with government to make it possible for the economy to grow? How would the much-needed jobs be created? How would the government generate revenue when the economy was not growing fast enough? The number of people in queues for social distress relief showed the extent of unemployment.

Lastly, she was concerned that when political programme meetings were convened at 10am during the week (prior to COVID-19) – there were full stadiums. This indicated the number of unemployed people in the Country. What was the partnership between National Treasury and the private sector to battle poverty?

Dr D George (DA) stated that the GDP projections seemed unrealistic and therefore significantly distorted the budget projections. The economy cannot grow if entrepreneurs could not thrive, and were not encouraged to do so. He referred to section 12(j) of the Income Tax Act, which was falling away. This was originally intended to encourage investment in new ventures. How would you encourage entrepreneurs and small businesses to grow in the absence of additional tax incentives? It was mentioned in the presentation that the corporate tax rate would be lowered after April 2021. This was on the back of limiting interest deductions and assessed losses. This was extremely vague. Where were the details of these tradeoffs, given the significant impact that it would have?

Regarding the Retirement Fund Reform, the Minister mentioned that regulation 28 would be amended to make it easier for retirement funds to make investments in infrastructure. This was money that government clearly wanted. Pension funds actually belong to their respective members, it was their money. There were calls for members to be able to leverage their money to their own benefit especially during the COVID-19 crisis. What progress was made with respect to members being able to leverage their own pension funds to their own benefit? For example, a limited early withdrawal or a broader loan arrangement beyond a home loan.

He raised a question in relation to the bail outs of the State-Owned Enterprises (SOE’s) and high level of government borrowing. This was ‘crowding out’ service delivery of basic services to people. Was there an upper limit to the bail outs – or would they continue ‘unabated?’

Mr G Hill-Lewis (DA) expressed that the decision for the below inflation increase for the social grants was ‘indefensible,’ particularly given what Dr George had highlighted about the bail outs. To prioritize yet more bail outs over the living needs of the most vulnerable in society was indefensible. He was quite surprised by the decision and expressed that it was inexplicable. It spoke to the priorities of government. The result was that the poor in South Africa were getting poorer as a result of the below inflation increases and increase in the fuel price – this disproportionately affected the poor rather than the middle class. The R580 per month food poverty line was getting further and further away for the poorest of the poor. 

When was the budget signed off by Cabinet? There were a couple of things missing from the budget book that were in the speech and the speech was received very late. He requested clarity from the Minister on this. He found no reference to the reduction in the corporate tax rate in the 2021 Budget document/‘red book’ – he asked whether someone could point the reference out to him, or if it was not included, if it could be indicated what the revenue implications would be. If it was a late addition to the budget, why was it added late – proposed by whom?

The reason the numbers worked in the budget was because it was assumed that there would be a R300 billion saving on wages. If that saving did not materialise, the budget would not materialise. He requested that more detail be provided in that regard. The government had tried in the past to institute voluntary retirement which had not worked. There was little to no take up of that early retirement offer. Was the government considering actual retrenchments, head count reduction, and what was the procedure for effecting that? Has the Treasury considered how that process would work? Have discussions started around head count reduction retrenchments with public sector unions?

Mr D Ryder (DA; Gauteng) referred to page 19 of the 2021 Budget document, in the grey block there was a figure that showed two scenarios where there was a deviation of GDP based on the two scenarios. Scenario B showed what would happen if there were more waves of COVID-19 through the economy and causing similar havoc to the first waves. Scenario A showed a reasonable recovery – which he assumed would result in the 3.3 percent growth. Scenario B showed a much lower increase, in fact there were contractions going forward. The gap between the two scenarios was the cost of the failure to procure vaccines on time and the roll-out of vaccines timeously. This was the scenario that was already playing out. Therefore, does the 3.3 percent recovery really reflect the current situation? The vaccine roll-out had not happened in the manner that was hoped for. No one would bet against waves three and four hitting? The vaccine was not rolled out in time. Therefore, should they be speaking about 3.3 percent or should they rather be speaking about a lower figure.

He referred to page 81 of the 2021 Budget document, which outlined the debt recovery plan. On page 81, three risks to the finance strategy were detailed, (a) a widening budget deficit, which the Country was almost certainly facing because the 3.3 percent would not be met. The second risk (b) was the inflation and exchange rate risks, which the Country would almost certainly see as the economy was not growing anywhere close to what other economies were growing at. The slide was shown comparing South Africa’s economy to the global economy, even the 3.3 percent was hopelessly below peers and other emerging markets. The third risk (c) was a sovereign credit rating further downgrade, which based on the recent notice, was almost a certainty. There were three risks to the finance strategy and all three held true. It meant that the economy was in serious trouble. What was a bond issuance strategy going forward? There had been quite an aggressive bond issuance, which had done reasonably well to stabilise things. The aggressive strategy could not be continued as it was became more and more expensive in terms of 10–12 percent bond yields.

The Defence and the Police seemed to be the two hardest hit departments in terms of their budgets. This was not consistent with what the President did when he deployed the South African National Defence Force (SANDF) in support of the South African Police Services (SAPS) and the fact that there was so much reliance on them at this stage. He requested a comment on the fact that those were the two biggest budget cuts.

Mr X Qayiso (ANC) stated that some analysts had argued that South Africa was a sovereign state that issued its own currency and only 11.9 percent of its debt was dominated in foreign currencies, with total assets of R15.9 trillion at the end of December 2019. The financial sector had not been so supportive toward a number of initiatives that the government was trying to do. It was about time. It had been ‘dragging its feet’, it had to be ‘forced to be drawn to the match.’ Its significance could be realised. It was not understood why there were assets of R15.9 trillion and South Africa ‘dragged its legs’ when it came to the economic situation. One would support the initiative that both private sector and public sector needed to pull together to ensure there was growth in the economy. Between 2013 and 2019 the GDP of foreign assets accumulated a surplus of R33.7 billion unlike the private sector fund which must be fully funded, as it could go bust. There was no scenario where the Government Employees Pension Fund (GEPF) would need to pay foreign nationals on the same day. There would always be nurses and teachers to contribute to the fund. There was no reason for the GEPF to be fully funded and accumulate such obscene surpluses in a country that had such high levels of poverty. Has the government and social partners considered the possibility of those financial assets, for example the GEPF of foreign assets?

In relation to jobs, the Country had lost about 2.2 million jobs in 2020. 900 000 Jobs were recovered to date. In reality the Country had lost 1.3 million jobs, this was the most notable amount in the SME category. Was it not time to look at making both fiscal and monetary policies more mutually reinforcing in bringing about a stimulus of growth in the economy.

He was pleased that the budget responded to the need for continued infrastructure maintenance. The extension of the Municipal Systems Improvement Grant was welcomed, but would it be enough to deal with annual recurring unfunded moneys that local governments assisted with?

In relation to the high unemployment rate, he asked why the National Treasury had not aligned its symbolism with that of the President’s, in reference to State of the Nation Address (SONA), and the use of the metaphor of a veld fire. He suggested there needed to be a more sustainable approach to unemployment than that of the temporary public works programmes. He asked how the Minister would respond to analysts from the Progressive Movement who stated that the Budget fell back on austerity

Ms P Abraham (ANC) highlighted that there were only male Director Generals represented in the meeting. She hoped that the representation at the meeting did not reflect the make-up of the National Treasury. She was ‘thrilled’ that money was being pumped into the vaccination programme. The oversight function of the Finance Department was important as it had a duty to ensure that vaccinations got rolled out in all areas of the Country. There needed to be some working relations between National Treasury and the Department of Health.

She highlighted the issue relating to basic education. The President had indicated in SONA that there needed to be improved education outcomes and an effort to regain lost time. The budget review indicated that low compensation growth of 0.8 percent over the medium term and early retirements would reduce the number of teachers with rising number of learners. This implied that there would be larger classes which would affect the learning outcomes, contrary to what the President announced. This reflected a cause-and-effect relationship which could partly be attributed to the Budget. She requested a comment on this.  

When it came to social development, the Budget Review stated that the function aimed to reduce poverty and inequality by providing social welfare services and grants. The total social grant spending was reduced by R5.8 billion in 2021/22, R10.7 billion in 2022/23 and R19 billion in 2023/24. This was the first time this had occurred in more than a decade. Now, all grant values would increase less than inflation whilst the number of beneficiaries were expected to increase by 300 000 people over the same period. The Minister announced social grant increases that were less than the 3.34 inflation rate, which meant that people would have less money in their pockets over the three year period after taking into account inflation. Why did Treasury opt for the below inflation rate increases, given that many families relied upon grants to survive? According to Statistics South Africa’s 2019 report, over 55.5 percent or 30.3 million were living in poverty. What measures were in the 2021 Budget to address this?

With regard to the public sector wage, the proposed R303 billion over four years would lead to a lower demand side-push in the economy and not result in the intended growth that was needed. This framed the way for the lowering of morale in the public sector especially since performance management was needed in the collective bargaining matter being cut-out. The likelihood of people leaving the public sector was a real prospect. They were meant to be building social cohesion and the proposals were likely to do exactly the opposite. She requested a response to that.

She noted that the other members had spoken a lot about economic growth. She requested clarity as to how the Country would increase GDP growth to create fiscal sustainability.

Mr L Morolong (ANC) asked whether the private medical aids contributed to the passage of vaccines to its members as well as to the citizens as a form of ‘social solidarity.’ The infrastructure fund had been budgeted for at about four billion Rand, can the Treasury indicate what the four billion Rand had been allocated to and how it would be leveraged to increase infrastructure investment in the Country. Regarding the public sector wage bill, could the South African economy hold line increases of about 1.2 percent for the next three years? What was the view of the Treasury regarding the notion that there should be a special allocation, at least to health and frontline workers who had carried the Country through the crisis? Had the state bank and the Sovereign Wealth Fund been budgeted for, if not, why not?

Mr W Aucamp (DA; Northern Cape) recalled that the Minister had said the year before that the Budget did not leave room for any mistakes. There was no room to do things wrong, things needed to be done right. The presentation stated that the fiscal policy concentrated on a few things one of which was debt stabilization. The country’s gross debt to GDP was projected to stabilise at 88.9 percent of GDP in 2025/26. The current debt service cost was R960 billion over the medium-term. It was the third largest spending item by function in the Budget. If there was room for mistakes, that amount would grow. The Budget did not leave any room for any mistakes.

The Minister had confirmed that the government would not nationalise the Reserve Bank, and he wanted to commend the Minister on this. This was one step to creating stability. If one considered the budget deficit, it was currently at 14 percent of GDP. It was stated that this would narrow to 6.6 percent of GDP in 2023/24 and the country was on track to receive that revenue surplus in 2024/25. To achieve that, no mistakes could be made. The Country could not make any mistakes, and yet state-owned enterprises were still being bailed-out. Government was still doing and pursuing its appropriation of land without compensation that everyone knew led to downgrades. Downgrades would result in higher interest rates and higher costs, which in-turn would take services away from the people. The Minister previously said that the Ministry could not do things that were above their pay grade. It was high time that the Minister and Ministry did things that were within their pay-grade. This included advising government on what would be to the detriment of the country. If an environment was created that was conducive for investment it would lead to job creation, lower costs, an improved economy and help to maybe achieve what the Budget laid out. With reference to Operation Vulindlela, it said that the regulatory legislation would be reviewed, which made it difficult to import scarce skills. Looking at it from a different perspective, if government stopped the implementation of the ‘draconian’ Black Economic Empowerment (BEE) policies, the Country would not lose people who live in the Country who may possess some of those scarce skills.

What would the Ministry do to assist in making sure that those same mistakes were not made with respect to public enterprises? Surely, there must be some incentive for good work and penalty for bad work? Those enterprises could not be bailed out on a regular basis. The country’s biggest threat was the COVID-19 virus, yet the amount of money that was made available over a two-year period for the distribution of the vaccines was less than what was given last year to South African Airways (SAA). The year before, SAA received R12 billion, a rounded figure, and far less was being given over a two-year period for the distribution of vaccines. Surely, that could not be? He stated that there was always a downward adjustment of the figures they received. How would this Budget be achieved if there were no measures in place to prevent the downward adjustments?

Mr A Sarupen (DA) noted that tax increases were penciled in that Treasury had decided to walk back on. He requested to know what those were - in the interest of transparency. What tax increases were planned, would these come over the medium term? Apart from the excise duties and fuel levies, were there any personal income tax increases planned? What steps was National Treasury taking with regard to price benchmarking for goods and services? Cost escalation in the procurement of goods and services was beginning to become a critical problem for the state, particularly given the extremely constrained fiscal environment the Country was in. There could not be situations where SOEs were paying R20 for a bottle of water. What was the Treasury going to do in terms of ensuring there were caps to ensure that procurement happened at a reasonable price?

His next question related to improving the multiplier effect of state expenditure. Analysts had stated that for every Rand taxed out of the economy, state expenditure only had a multiplier effect of up to 60 cents. That was not a good multiplier effect out of the State – what steps were going to be taken to massively improve the multiplier effect? This spoke to price benchmarking and cutting out leakage in the system. Considering that the State had missed its revenue projections and targets consistently over a very long period of time – would the State be able to avoid a fiscal cliff if it missed its growth and revenue projections over the next three years? How close would it be getting if it missed its projections for growth? Was it the intention, this financial year, to empty out the contingency reserve again for SOE bail outs? This was done time and again – ‘snuck in through an adjustment budget or emergency.’ Would it actually be used as a contingency reserve this time?

Mr E Njandu (ANC; Western Cape) raised a question relating to the National Student Financial Aid Scheme (NSFAS). The Minister of Higher Education had spoken about the NSFAS funding for 2021, and stressed that there would be a shortage in terms of the NSFAS. Would it be catering sufficiently for 2021, so that they did not have the previous NSFAS challenges?

Mr F Shivambu (EFF) stated the EFF’s overall observation was that the Budget failed to respond to the actual difficulties of South Africa’s economy. There was no significant industrialised or expanded manufacturing sector – these sectors were largely responsible for economic growth. In the details of the Budget presented, the allocation to the Department that dealt with the Industrial Policy was reduced by 1.3 billion rand.  This was problematic as this was the only way to deal with the debt crisis – broaden the productivity and revenue base. There was nowhere in the world that fiscal consolidation was a mechanism to deal with debt obligations. To drive a proper industrialised economy, one needed stability i.e. in the supply of electricity. He suggested that the amounts paid by ESKOM to independent power producers was well above internal generation costs and this was central to the debt situation. If ESKOM did not stabilise there would be a permanent crisis of no reliable and dependable energy sources. This would have a direct impact on industry and economic growth – which was needed to expand the revenue base, expand jobs and eradicate poverty. Everyone agreed that the country should have renewable energy to reduce the carbon emissions but there was new scientific evidence coming from CSIR that coal could continue to be used as a ‘base-load.’ One could continue to use the natural resources in South Africa. Renewable energy forms being implemented in South Africa was not a dependable source of energy. Anyone who stated differently was a ‘liar.’

In terms of the loans taken that amounted to R100 billion. What was the logic in taking out a R100 billion loan from the International Monetary Fund (IMF) when debt obligations/debt servicing costs amounted to R200 billion? How many vaccines would be procured with R10 billion? Vaccines were already paid for – which would expire in April 2021. How many vaccines would you be able to buy with R10 billion. How could R10 billion be celebrated when the coverage of that R10 billion was not known. It might be inadequate or it might have been overspent – it was not known. The Department of Health was relying on the National Prosecuting Authority (NPAs) to avoid accountability in that particular regard. With respect to the procurement of vaccines – would they be compliant with procurement policies? The procurement policies emphasised price as the mean determinant of who must supply what form of vaccine. It could not be a political decision that, for example, Johnson and Johnson vaccines would be used. It needed to be based on scientific evidence in terms of effectiveness and the price mechanism needed to be applied.

The overall expenditure would be reduced by R65 billion in the 2021/22 Budget, R90 billion in the 2022/23 Budget and more than R140 billion in the 2023/24 Budget. That budget reduction was part of the fiscal consolidation, the austerity measures being implemented by National Treasury. They should not be misled to think that nominally the figure of 200 billion sounds too big. Once one started reducing the government expenditure with the purpose of trying to meet ones debt, it was austerity – ‘people who claimed to be economists would have understood and known this.’ What was tragic about this was that even the IMF ‘God-father of austerity measures’ had come to the realisation and acknowledged that such methods of resource management and budget allocation did not bring about the necessary growth in the economy. It would not help to deal with the poverty challenges in society. How were social grant allocations decreased, for instance? What was going to happen when the numbers of recipients increased? If one increased social grants below the inflation rate, one was effectively reducing the value of the amount of the social grant. There was also a reduction in the education allocation, meaning that a lesser number of students would be allowed entrance into institutions because of fiscal consolidation.

Ms Peters stated that as the African National Congress (ANC), they really appreciated the fact that the Treasury had allocated an amount from the contingency reserve for the vaccines. For the country to reach a 67 percent vaccination rate, that type of assurance was needed. It was good that there was something put aside in the case of shortfalls.

She appreciated the budget allocation toward the Community Works Programme and Expanded Public Works Programme (EPWP). When one went into the communities and saw the number of unskilled, unemployed people, this type of programme covered those groups of people. She believed that what those programmes needed to focus on fulfilling the vital jobs that existed i.e. not ‘cutting grass’ but assisting in the ‘cleaning of hospitals’ etc.

According to the analysis that was done, it was highly unlikely that the fiscal consolidation could be achieved by a public wage freeze alone without the reduction of personnel, particularly in terms of education and the criminal justice system. The population was growing, the number of learners was growing and the COVID-19 protocols demanded that the classes be separated and less children be permitted per class. Considering that the population was increasing, would the mere value of public service not decline in the medium term. Would the budget for essential goods and services, like text books, medicines and maintenance of public infrastructure, not come under increasing pressure?

Responses

Mr Tito Mboweni, Minister of Finance, clarified the questions for the team to respond to and requested that this was done as it related to the order it was presented within the 2021 Budget document. He also requested specifically that the question regarding accurate forecasting be addressed.

Mr Mogajane stated that National Treasury was comprised of 55 percent women; they also constituted a high number of the deputy directors.

Dr Pieterse addressed the question relating to the economic outlook. Macro-economic forecasting was challenging at the best of times. It was particularly challenging when one was in the middle of a pandemic. It was therefore important to be modest in ones forecasts. Treasury was confident in the macro-economic forecasting tool that was used. It was benchmarked domestically and globally. As discussed before, a study was done by the Parliamentary Budget Office, one or two years ago, that looked at the accuracy of the National Treasury forecast. The Parliamentary Budget Office concluded that National Treasury’s forecast was on par with, and in many cases better than, many of its peers. The forecast took into account a range of assumptions about commodity prices, global growth and the fiscal framework. This was fed into a macro-structural model that then produced a macro-economic forecast that informed the fiscal framework. It indicated what to expect on the GDP growth and inflation. Then those variables then underpinned the fiscal framework or the framework of the National Budget.

 

In terms of the 3.3 percent for the 2021 period, this was high in a ‘slightly misleading way.’ This was because all Treasury’s growth numbers were quarter on quarter, or year on year numbers. It was always relative to the previous year. Part of the reason the 3.3 percent seemed high in historical terms was because in 2020 it was not expected that the economy would contract by -7.2 percent. If a very large contraction occurred within one year, the next year’s number was bound to be higher than usual. This was what economists refer to as the ‘base-effect.’ A big part of the reason the 3.3 percent in 2021 was due to the base-effect. If one looked beyond the growth rates to the level of GDP, one would find that because of the -7.2 percent contraction, the size of the economy was much smaller than it was in 2019. In fact, based on the National Treasury’s projection, the economy would only get back to the place it was in 2019, in 2023. The size of the economy was much smaller in level terms due to the very big contraction that resulted from the COVID-19 pandemic.

In terms of forecasts for the same period, Reuters did a survey of all the other forecasters in the country and what was anticipated in 2021. If one took an average of all of those forecasters, they actually anticipated a GDP growth number of 3.7 percent in 2021. That 3.7 percent was higher than the 3.3. percent. The Reserve Bank predicted the GDP growth to be 3.6 percent. The reason these predictions were different was largely due to the pandemic which caused a lot of uncertainty.

He addressed the question relating to why the country’s growth was stuck below two percent. Part of what National Treasury had outlined in previous budgets, were some of the constraints to the country’s growth (outlined in chapter 2 of the 2021 Budget document). If one considered the actual drivers of growth, there were two or three main drivers when one did not take into account imports and exports. Household consumption, government consumption and investment were the three main drivers. Of those three, the two main drivers were household consumption and investment. If one considered investment, 70 percent of the Country’s investment came from the private sector. That investment had been shrinking over time, even before the pandemic. The question was then why had the investment been shrinking. He provided a number of examples. Part of the reason it had been shrinking was because it was very different for manufacturing plants to expand their operations if there was uncertainty or unreliability around electricity. It was also very difficult for tele-communication companies, including MTN and Vodacom, to invest in telecommunications infrastructure if there was no additional spectrum for them to use. It was difficult for farmers to expand their farms, if it was difficult for them to get a water use license. Part of the reasons that operations at Vulindlela focused on network industries, such as water, transport and electricity was because unless it was made easier for the manufacturing plants to get access to reliable electricity and to a port system that was efficient and on par with the rest of the world, they would not invest and expand and GDP would remain below two percent. Through focusing on the binding constraints/’bottle necks to growth’ it was hoped that eventually growth would be raised above two percent overtime.

With respect to the question regarding the scenarios on page 19 of the 2021 Budget document, there were two scenarios put forward because National Treasury published a baseline forecast. It was, however difficult to know what would happen, the scenarios therefore gave National Treasury a sense of what some of the alternatives might be. Scenario A did not, as Mr Ryder suggested, align with the 3.3 percent, it was an upside scenario. Scenario A aligned with 3.6 percent in 2021. This showed what was possible for economic growth if the reforms were implemented particularly in the network industries, as previously outlined. The horizontal line was the baseline forecast, and the red line below it was a downside scenario, which was what would happen if there were additional waves of the pandemic and what that might mean for economic activity. Part of the reason National Treasury put that forward as a scenario was because it was very difficult to say what kind of restrictions to economic activity might be associated with any future waves nor the intensity and impact of these.

Mr Sishi referred to the fiscal framework. The presentation had shown the fiscal framework on a consolidated basis. If more detail was sought, one could refer to chapter three of the Budget Review, in particular table 3.7, it showed the fiscal framework without the security funds and public entities. The framework, whether one did it on a consolidated basis or on the basis of the main budget, was divided into three broad components. The first was the revenue of government, which was essentially the tax revenue. The second was spending which was subdivided into (a) what the government spent in terms of allocations and the contingency reserve and (b) the debt service costs. The revenue minus the spending was the fiscal balance, which could either be in deficit or surplus. As indicated in the presentation the balance had been in a deficit position for many years. Both the main budget balance and the primary balance had been in deficit. The primary balance was the revenue minus the spending excluding debt service costs. It’s the physical balance that was dependent upon the policy decisions of the government. If one considered the revenue both on the consolidated or on the main budget basis, the revenue of the current financial year, would really fall down. This was expected to be R1.2 trillion but as a percentage of GDP it translated to about 24 percent of GDP. In the last financial year almost half of GDP was collected as revenue. Even though there would be a recovery, the actual economic activity in the country would only return to what it was, over a number of years. It would take about four years to get back to where it was. This meant that the tax revenue recovery was equally going to take a while to get to the place it was. Therefore, when one considered the expenditure part of the framework, it was clear that one did not have scope to decide to increase expenditure on a permanent basis. It would be irresponsible to permanently raise the level of spending when the revenue would take such a long time to recover. The physical deficit had been in negative territory for a long time. The country had been spending far more than it got from revenue. It was not a phenomenon that was unique to the current financial year. It had become structural in nature, measures needed to be taken in order to begin to close it. If it was not closed, that deficit implied increasing debt for government and that debt would incur interest and that interest was growing. This year, interest was going to be more than R230 billion over the medium-term framework, it would be more than R900 billion. The more the interest increased, the more it crowded out other spending obligations of government i.e. the less one had to put into education or social development etc. It was critical, if one wanted to protect service delivery and spending priorities of government, one could not allow the interest bill to continue growing permanently. That was what the fiscal strategy was about: reducing the interest bill by closing the fiscal deficit that had been there for a very long time. This was to prevent spending reductions across government, not just the social grants for example.

He addressed the question regarding fiscal multipliers. The 2021 Budget was aimed at addressing precisely the issue raised. National Treasury had determined that too much of the budget over the last decade or so was spent on items with low multipliers, in particular consumption spending. This budget shifted the focus of spending from that toward higher multiplier spending, being infrastructure. Even in the short term the spending decision that National Treasury had made with respect to the vaccine was an example of shifting toward high multiplier spending. This was because vaccine spending would lead to the opening up of the economy due to a reduced reliance on lockdowns. The contingency reserve that National Treasury had set aside and increased was specifically there to deal with those emergencies, mostly the emergencies arising from COVID-19. This was all explained in chapter three of the Budget Review.

Mr Ismail Momoniat, Deputy Director General: Tax and Financial Sector Policy, National Treasury,responded to the questions relating to tax. In the past, National treasury used to hold a dedicated day to consider all the tax proposals that would take place. He would welcome the opportunity to have a day to speak on tax. There were a number of trends to show etc. The Draft Rates and Monetary Amounts and Amendment of Revenue Laws Bill was published. It dealt mainly with the rates and threshold changes. The National Treasury had also published a Draft Financial Services Levies Bill which outlined the levies that financial institutions paid toward the costs of their regulation, to the Protection Authority and the Financial Sector Conduct Authority.

He addressed the question relating to regulation 28, the gazette asking for public comment would be published the following day, and largely dealt with pension funds enabling them to invest in infrastructure. It did not force them to; it enabled the trustees to do so at a higher level through different mechanisms. The National Economic Development Labour Council (NEDLAC) measures would take effect on 1 March 2021. There were quite of lot of discussions going on regarding withdrawals. The Minister had announced that Treasury was open to some form of withdrawals – but it needed to be linked to preservation. Treasury had been sitting with some of the stakeholders and NEDLAC to see how this would be possible – the problem had not been ‘cracked’ yet. Once the processes of engagement had taken place, the Treasury would bring it forward through legislation. He wanted to emphasise that they wanted to get people to save and preserve, have limited withdrawals and have greater coverage. Those changes were in play.

There was a review of the section 12(j) incentive which was removed. It was found that most of it was taken up by those in the highest income brackets and very little went toward investment. In fact, only 37 percent of companies had added any employment after receiving the funding. The tax break was for R11.5 billion for the period; the investments were only a third of that, about R4.2 billion. Most of these were in low-risk ventures such as property and rental rather than hard investment that generated lots of jobs. This mechanism had not been utilised in the way the Treasury had anticipated. It did not promote small businesses nor create the number of jobs that the Treasury expected. This was not the only mechanism to support small businesses. Treasury was open to looking at other options.

Regarding the corporate tax rate, the announcement that had been made covered the next fiscal year. Normally, that announcement would not be made the following year, but only in two years time in the 2023 Budget. The last time Treasury had reduced the corporate tax rate was in 2008. Treasury had just wanted to signal the future path, the problem with this was that in the last couple of years both the United Kingdom (UK) and United States of America (USA) reduced their corporate rates significantly and South Africa was now an outlier. Treasury was not only reducing the rate. It was doing so in a tax mutual manner. The year before Treasury had linked it to limiting interest deductions and assessed losses. Treasury had produced a discussion document the year before, that they had wanted to put in place for 2022, but with COVID-19, that process was delayed – it was still a work in progress and the Treasury would continue with the consultation processes. Treasury wanted corporates to continue to pay the same amount of tax that they previously paid but to do it more fairly between corporates by allowing a lower rate for all. This would be a bigger stimulus toward supporting growth rather than giving tax deduction to only a few companies – which in any case could be abused. It would only take effect the following year, effectively what it meant was that the fiscal framework was not changed – for that reason it was not put into the Budget Review book. It was meant as an announcement for the future. It would be taken up in the Draft Taxation Laws Amendment Bill (TLAB) when Treasury dealt with the assessed losses and interest deductions.

In terms of increases on taxes, there had only been a small increase in 1994. Generally the country’s tax rates had gone down. If they could broaden the base, the rate would be reduced. That was being done with the corporate income tax and this was what Treasury wanted to do with all its taxes. It was only in 2015 that Treasury started increasing taxes. There were problems at SARS – not getting all the revenue. Treasury started increasing personal income tax by one percent for every tax bracket except the bottom one, and then later increased the top tax bracket for the wealthiest to 45 percent. The revenue did not come in – this was because ‘the very wealthy knew how to structure themselves out of paying and how to do it legitimately in terms of the law.’ People got the best minds to ‘structure their way out.’ It was something the Treasury needed to keep in mind. There was no intention to raise any tax – ideally it would be going down – the Treasury would want to reduce taxes as revenue collection went up, the economy would grow when taxes were lower.

In terms of missing revenue forecasts over a number of years, there were a number of reasons, either it was related to growth or for example the effect of COVID-19 which was not even anticipated in the Budget of the year before. The lockdowns caused a huge decline in revenue. It was anticipated that the revenue that would be collected at the end of the next financial year would be similar to that of the end of the 2019/20 year.

Ms Tshepiso Moahloli, Acting Deputy Director General: Asset and Liability Management, National Treasury, addressed the questions relating to the strategy and acknowledgement of risks that the country was facing. With the borrowed requirement of R770 billion that was forecast the year before, borrowing had been aggressive and it had contributed to higher borrowing costs. Currently, the country was issuing R24 billion on a weekly basis – which was quite aggressive. She referred to table 7.2 in the Budget document; it showed the different instruments that the Treasury used to fund the deficit. Recognising all the risks, Treasury had to deal with increasing the country’s short term loans significantly higher than would normally be done. With reference to table 7.2, if one looked at the cash balances, in the upcoming year the Treasury would be using some of its cash balances to fund the Budget balance which included the redemptions not just the interest costs. That was trying to deal with some of the risks. Treasury had limited its foreign currency issuance due to not producing dollars and ensuring that the country was not exposed to currency risk; however it excluded the country from when the ‘going was good.’ The funding strategy was very uncertain and challenged. In the Budget Review the Treasury had shown a declining gross borrowing requirement. Even though the budget deficit was coming down, what was impacting the country the most was that over the past few years the country had not been paying its redemptions which were then due. This increased the amount they would acquire to finance those redemptions.

 

Treasury had diversified funding sources including borrowing from the IMF, the debt service cost was at R269 billion and the redemptions were even higher than that in some years, which necessitated that the Country continue to borrow in order to make sure that they did not default on their obligations. Those loans were at very reasonable rates, with no conditions. The IMF loan came in at 1 percent over five years for R4.3 billion – there was no market that would give one money for 1 percent in this environment with the kind of risks that they were facing. The country’s ability to access this funding was very important. She referred to table 7.4 of the Budget Review and table 7.11. If Treasury did not take advantage of the kind of rates that they were able to borrow from, that money would be deployed to other countries at cheap rates. It was important that while they did put money into those institutions, they were also able to leverage on the very same institutions for the funding required.

 

The issue of debt and debt sustainability was a significant issue. Even though the country was able to access markets, the risks were very high. If they continued on the current trajectory, at some point they might not be able to afford the debt that kept piling up. The country had not been paying its redemptions – they needed to start paying back those, instead of pledging them over time and hoping that they would be able to generate enough cash to deal with them.

 

With the foreign savings declining, what Treasury had observed was that the local investors/asset under management deployed to support the government – despite it being a very difficult time. The argument that the financial sector was not supportive and therefore must be forced – did not hold true if one looked at the numbers. Yes, the asset under management was huge but they were already deployed. If one compared the 2019 and 2020 growth rate numbers there was an increment of about one trillion Rand in asset under management – that was new money. If one looked at the government funding requirement that reached almost R700 billion, it left very few other players in the economy to get funding in those forms of savings so as to invest in the economy. Most of the funding was deployed in the economy. She suggested that Treasury had seen a massive support from local funders. They had also seen a show of support in terms of bond auctions. Foreigners had sold the country’s bonds because they were worried about the country’s ability to pay its debt. What had carried them through was the very financial sector referred to – which was supporting the government in its mandate for service delivery. That was also a risk in terms of the fact that certain asset classes – in terms of how much banks could hold in terms of asset classes was something the Treasury needed to consider going forward. Treasury needed to ensure that banks were not holding a lot of government debt – because of the inflation risk that could ultimately pose systemic risk in the banking sector or financial market.

Dr Mampho Modise, Acting Deputy Director General: Public Finance and Economic Policy, National Treasury, noted that the Political Party Funding Act prescribed two types of funds: the political party funding that the fiscus allocated funding for and then the new fund was the multi-party democracy fund where there was basically private sector funding. The aim of this Act was that all the funding that sat in different places should be put in one fund so that there was currency in managing that funding. The fund would be managed by the Independent Electoral Commission. A unit would be established that would manage the funds. Up to date, R80 million was allocated to start up the fund. If one considered the allocation from the fiscus, it would increase from R166.8 million in 2021/22 to R171.7 million 2023/24. This constituted an increase of just under two percent for the funding. If one considered the multi party democracy fund, so far there was a pledge of five million Rand, this would be marketed so that they could get private sector funding. This was not the only funds that political parties got. There was also an allocation that was done to Parliament where there was political party support, there was also constituency support and party leadership support. She offered to send the presentation, that she had referred to, to the Secretariat, so that it could be shared with the Members.

In terms of the Department of Health and the funding of vaccines, Treasury had tried to determine how much it would cost to buy the vaccines. The Minister had tabled a Special Appropriation Bill so that they allocate funds to the Department of Health, approximately R1.2 billion. The amounts that were in the allocation for the Department of Health were based on a model that the Treasury and the Department of Health worked on, those were the preliminary numbers. The pandemic was unpredictable. Treasury had based its estimates on models. The Treasury thought the funding that was allocated was sufficient, if it was not sufficient there was a contingency reserve that would be used to support the Department of Health.

Regarding NSFAS, Treasury was already working with the Department of Higher Education to deal with the funding for NSFAS. In terms of social grants, from 2012 Treasury had tried to ensure that the social grants were protected – even when they had to provide R56 billion to fund higher education. What Treasury had noted was that there was now a need for consolidation and to deal with the budget deficit. It was difficult to fully protect social development and social grants. Treasury had considered the implications and understood what an inflation increase meant but tried to ensure that at least they did increase the social spending. By doing good now – consolidating – this would ensure a better situation in the future, if this took place, social grants would be the first to be addressed. The Treasury had tried to balance the situation by providing for the poor and the need to consolidate.

Minister Mboweni stated that as the country was going through the COVID-19 crisis last year, they had kept on coming to Parliament so as to keep Parliament informed of their thinking processes and the adjustment of the initial plans of February 2021. Treasury also had to consider the funding for South African Airways (SAA). Treasury had obligations from the business rescue practitioners to make provision, in terms of law. The law required that Treasury came to Parliament for that special appropriation to meet the requirements of the business rescue practitioners. Regarding the State Bank, a memorandum was on its way to the Cabinet. There was a feasibility study done. Dr Masondo had been dealing with this.

It was asked when Cabinet had signed off on the Budget. The process of designing the Budget started with the technical teams in the different departments working on requests which were made for their departmental budgets. He handed over to the Director General to provide more detail of the process – as he dealt first hand with it.

Mr Mogajane stated that every year around June, or earlier, budget guidelines were issued. Budget guidelines essentially spelt out key dates and the assumptions that departments and entities used in submitting budgets. The budget guidelines were issued on Treasury’s website and were freely available to the public. Within the budget guidelines various functional group meetings were outlined including, Director General forum meetings, the Medium Term Expenditure Committee Meetings (MTECH), budget meetings, cabinet meetings, extended cabinet meetings, budget forum meetings and budget council meetings, all of which had an input in the budget process. The political meetings were supported by technical committees that sat on a regular basis and engaged. Departments in these various groupings developed budgets that were then submitted to MANCO’s teams in the National Treasury, the public finance division team issued an in-detail database that spelt out what exactly each department had to do and what programmes would be funded. Based on the discussion between the team of Chief Directors in Public Finance and the director generals in the various departments, matters were escalated to the Director General Forum. Finally, all of these were escalated to the MTECH meetings Minister. The Director General in the Presidency, Department of Public Service and Administration (DPSA), Cooperative Governance and Traditional Affairs (COGTA) and public finance would attend this. It was that committee that would make recommendations to the Minister’s Committee on the Budget based on what needed to happen. The Ministers Committee on the Budget would meet at least once a month till around the time the Budget was presented. Around September/October before the medium-term budget statement the Extended Cabinet, the Premiers and MECs for Finance would make recommendations to the Committee. They would consider the division of revenue, the split and key issues and assumptions that would be informed by the various Lekgotla of the Cabinet. The Lekgotla would make final recommendations from SONA which spelled out the key issues and the President’s intentions. This would then inform the budget process.

In terms of the dates and the timelines, one expected that some issues would come up, especially in relation to the COVID-19 environment. The previous year the medium-term budget statement was passed and the implications for COVID-19 and the cost of vaccinations came thereafter. It meant that a special Cabinet was called to consider the budget. Finally, with various iterations in the process, meetings would take place. In Cabinet, as Treasury, they had a standard finance item, ‘financial matters,’ where the Ministers had the opportunity to raise any matter. Treasury had consistently over the last year used Cabinet to bring up budget related matters. In terms of dates, therefore it depended on what specific issue the Member was referring to, they had an extensive Cabinet Lekgotla where an extensive fiscal framework was presented. The final framework was the one tabled on Budget Day. There were various assumptions and iterations of the Budget. Cabinet would sign off on the broad aspects of the Budget framework. The deficits would be finalised at the time of the Budget. Tax policy matters were made by the Minister of Finance and his team, they would make final recommendations to Cabinet and the President till the very last Cabinet meeting before the Budget was passed. He offered to provide the process on paper with the specifics as he had just provided an overview off the ‘top of his head.’

Minister Mboweni said the final sign off from the Cabinet relating to the 2021 Budget took place on Tuesday 23 February 2021.

He stated that Members could not ask what Treasury was doing to make the private sector invest. One could not force the private sector to invest, it was a democracy. Treasury created the enabling conditions to encourage private agents, including the private sector in terms of investment. The private sector invested where it saw an opportunity. He was Chairman of three listed companies before he joined the government. There was no way the Investment Committee would take orders from a political party or the government for that matter. If the private sector saw the benefits for its company, employees and other stakeholders, it would expand investment. There was one important factor that the private sector took into consideration when it came to whether to invest or not – and that was policy certainty. He quoted a study that was conducted by Goldman Sachs in 2005 which was a summary of the factors that were critical for growth. The first one was macro-economic stability which included low inflation, low government deficits and low debt (particularly external debt). Secondly, macro-economic conditions which included investment rates and the ‘openness’ of the economy. For a small economy like South Africa, where there was foreign and domestic investment, this became very critical. Thirdly, there was technological capacities and capabilities. In 2005 there were issues like the penetration of PCs, phones and the internet. Now it related to things like 5G and the importance of connectivity. Fourthly, human capital, which included education and life expectancy. If companies felt that a country produced the kind of people who were easy to train and skill, there would be confidence to invest. Fifth, the political conditions and stability – this brought to the fore the issue of corruption. There were about 13 of the growth environment scores. Before Members blamed the private sector for not investing, they needed to check whether those growth environment scores were sufficiently in place. There was also an issue of race, class, gender and investment – they needed to broaden ownership of the economy. They needed to remove the ‘notion that the private sector was all white’ – therefore these ‘white people’ did not want to invest – ‘which was incorrect.’ The scope of investment needed to broaden.

Page 17 of the Budget document was important. He referred to table 2.2, about the macro-economic performance and projections. It was important that this book be internalised and table 2.2. was very important in addition to the first couple pages.

Closing Remarks

The Chairperson stated that they would continue to engage the following week when there would be public hearings. The process would be taken forward. He agreed with the Minister’s point about an inclusive economy – it was very important. It was a fact that the existing economy continued to marginalise Africans, females, youth, people with disabilities and SMEs. It was factual, if one considered the statistics that were released by Statistic SA, unemployment had grown to 32 percent of the population. Those who were hardest affected were Africans and youth. The growing economy needed to do so with the aim of achieving inclusivity – it could not grow to benefit one sector of the population. That was a political matter. The issue relating to the Public Procurement Bill was discussed during the SONA debates. He believed that in 2021 the Bill would be tabled in Parliament. The State was the biggest procurer of services. More than R800 billion was spent on procuring services. Was there a percentage breakdown as to who benefitted? How do the marginalised groups benefit from that procurement? Almost 70 percent of the money that went to the SME’s the previous year went to white owned companies. That needed to be corrected.

Mr Shivambu interrupted the Chairperson. He stated that specific questions had not been answered. He requested that the Chairperson ask the Treasury to submit their responses in writing by a specific time. How many people would be vaccinated with the allocated amount?

The Chairperson stated that the questions that were not answered should be sent to the Minister’s Office and be answered in writing.

Mr Shivambu interrupted the Chairperson to state that they had every right to request follow-up answers to their questions – how else were they to hold the Treasury to account? There must be a commitment as to how many people were going to be vaccinated with R10 billion. How were procurement procedures going to be followed in the usage of that R10 billion. Those questions must be responded to.

 

The Chairperson agreed but asked that those questions be put in writing to the Minister and they would be answered before the meeting the following week. 

 

The meeting was adjourned.