Financial Sector Laws A/B: Treasury briefing; Private Members’ Bills: Pension Funds A/B & Fiscal Responsibility Bill: MP briefings

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Finance Standing Committee

16 March 2021
Chairperson: Mr J Maswanganyi (ANC)
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Meeting Summary

Video: Standing Committee on Finance, 16 March 2021 

In a virtual meeting, National Treasury briefed the Committee on the Financial Sector Laws Amendment Bill. Dr Dion George (DA) and Mr Geordin Hill-Lewis presented two Private Members’ Bills dealing with Pension Funds and Fiscal Responsibility respectively

National Treasury said the Financial Sector Laws Amendment Bill would introduce resolution planning and provide a framework for the resolution of banks in financial distress. It would also establish a deposit insurance scheme which would, in addition to a revision of the creditor hierarchy, give preference to ordinary depositors in the event of a banks’ resolution. The deposit insurance scheme would provide a coverage of up to R100 000 per depositor, and would partly be funded by premiums from banks. The scheme would especially assist smaller banks when there was a financial crisis. Because of the interconnectedness of financial institutions in South Africa, a failure of a small bank could lead to failures of bigger banks. Systematically important fiscal institutions had to be regulated intensively to prevent failure of the system.

Members felt that the presentation was very detailed and appreciated the information given. They asked who would underwrite the deposit insurance fund in the case of insufficient funds. They asked whether only big banks were assisted and whether the proposed Bill did not amount to a measure to protect monopolies only.

The Pension Funds Amendment Bill proposed removing the existing restriction that loans granted by pension funds to their members can only be used for purchasing or improving a home.

The Fiscal Responsibility Bill proposed to establish a fiscal rule for government budgeting. Each financial year, aggregated debt and guarantees could not be more than in the previous year. Fiscal rules can promote growth and restore confidence in the economy.

Meeting report

The Chairperson welcomed all to the meeting. The agenda indicated that National Treasury would present the Financial Sector Laws Amendment Bill, whereafter Dr Dion George (DA) would present his Pension Funds Amendment Bill, and Mr Geordin Hill-Lewis (DA) would present his Fiscal Responsibility Bill. He said that after each presentation, Members would be allowed to engage and hear responses.

Financial Sector Laws Amendment Bill [B15 – 2020] presentation
Mr Ismail Momoniat, Deputy Director-General: Tax and Financial Sector Policy, National Treasury, said that the Financial Sector Laws Amendment Bill was intended to provide a framework for the resolution of banks in financial distress. When there was even a rumour of a bank being in trouble people rushed to cash-out their deposits. No bank would ever be able to pay out all of the deposits if everyone came to cash-out at one time. Banks only had a very small percentage of their total deposits as they made loans from those deposits. For that reason, in addition to normal insolvency, banks could be put under curatorship. This mechanism existed under the current Financial Sector Laws Act and was used to deal with the recent crisis at African Bank.

The Bill stepped up the resolution regime for banks and other financial institutions. It also introduced a deposit insurance. South Africa was one of a few Group of Twenty (G20) countries that did not have a deposit insurance. Deposit insurance meant that for every deposit there was a small insurance that was paid into a fund. This fund was the first fund to be used in the event of a bank failure to pay out depositors.

At the moment, South Africa did have an informal deposit insurance scheme which was generally used to pay out depositors. Examples of this were at the Venda Building Society Mutual Bank (VBS) and African Bank, where about R100 000 was paid out to retail depositors. Up to R100 000 was implicitly guaranteed for depositors, with the assistance of the state.

The Bill amended many other Acts, such as the Companies Act and the Banks Act, to reinforce the existing framework.

Background on Twin Peaks reforms after the 2008 global financial crisis

The 2008 global financial crisis showed that when a bank was in trouble, it could easily become a systemic crisis as banks themselves were interconnected. If one major bank failed, all other major banks would fail because there may be deposits of the one bank in the other, or there were clients with deposits in one bank and loans from another who were unable to pay those loans.

Up to the point of the crisis, the G20 was only a forum for Ministers of Finance, but due to the crisis, Heads of State started attending the forum and created a higher forum. The G20 Heads of State forum had the basic mission at that point to save the world from the global financial crisis.

In South Africa, in 2011, Cabinet approved a document, published by National Treasury, called ‘A safer Financial Sector to serve South Africa Better’. Cabinet adopted this policy in 2011 and laid the foundation for setting up the Twin Peaks Bill. This Bill implemented two main regulatory reforms.

Firstly, the power of the Registrar banks was stepped up and converted into the Prudential Authority (PA). The PA looked at the financial health of financial institutions by assessing if a specific bank could deliver on its promise of allowing depositors to collect their deposits at any time; and by assessing if a retirement fund could deliver on its promises. So when one retired in a few decades one would be able to receive one’s pension. This dealt with financial wellness.

Secondly, the old Financial Services Board was converted into the Financial Sector Conduct Authority (FSCA), which regulated market conduct and protected customers. This was to ensure that banks treated customers fairly and that business was conducted in a manner which did not exploit classes of people. Linked to this was the Financial System Ombud, and tribunal and many other mechanisms in the Twin Peaks Bill which protected customers.

What had been done in South Africa

There were at least ten Acts which regulated the financial sector. All but one of the Acts were administered by the Minister of Finance. The National Credit Act fell under the purview of the Minister of Trade, Industry and Competition. After 2011, a range of framework papers were published. The Conduct of Financial Institutions Bill was the now key outstanding Bill, which, it was hoped, would be brought to Parliament later in 2021 for consideration.

More technical papers on how to deal with a financial crisis better had also been published. This was because lessons had to be learnt that a banking crisis in any country could quickly turn into a global financial crisis. The 2008 crisis led to a banking crisis in Europe. And the United States of America recession adversely impacted the global economy. Though South African banks were safe from the crisis, there was still a recession, with over one million South Africans losing their jobs.

Why was the Financial Sector Laws Amendment Bill needed?

Mr Momoniat said that banking risk was different from other risk. Banking risk was closely linked to sovereign risk, as banks held many government bonds. This meant that there was a doom loop, where a banking crisis caused sovereign risk, impacted the fiscus and created an economic crisis. Similarly, if the economy was in trouble for a prolonged period of time, it could lead to a banking crisis. If sovereign bond ratings went down, then banking ratings went down and the cost of capital went up.

This doom loop was what got government to intervene when banks were in trouble, because if the government did not intervene the problem would get worse. As a result, major banks could almost hold government to ransom by taking more risks, knowing that should they fail government would have to intervene. This was what happened with the crises in Portugal, Ireland, Italy, Greece and Spain in 2009, where there were issues with the refinancing of sovereign debt or the bailing out of banks.

Bank weaknesses generated huge costs for government. Banking crises had contributed to large increases in public debt. Governments were forced to intervene. It generally took longer for an economy to stabilise where a banking crisis was the cause of the recession.

The impact of a financial crisis was devastating on the economy

Banking crises were directly linked to fiscal crises. For the next 40 or so years the 2008 crisis would be remembered and then when that was forgotten there would likely be another big crisis. There were vast implications, such as declines in average life expectancy, primary school enrolment and the worsening of poverty and income inequality.

Bank risks were as significant as nuclear risks to an economy

When the Twin Peaks Bill was presented, it was said that banks had to be monitored intrusively and intensively, as was done with nuclear facilities. The economic impact of a bank failure could be as devasting as a failure of a nuclear facility.

Two linked concepts were introduced. Firstly, there were some banks that were too big to fail. No country would allow those banks to fail, as the country would suffer severely if that happened. Those banks were described systemically important financial institutions (SIFIs). This took into account the domino effect that the failure of a major bank had on other major banks and eventually the entire economy.

There was an issue with these major banks, because when there were profits made, they were paid out to the shareholders of the banks. Profits were privatised, but when banks suffered major losses, society had to deal with the costs. Losses were socialised. This was the problem that had to be prevented. It constituted a moral hazard, as banks would take even more risky actions to make profits for shareholders, [knowing the government would bail them out if any problems arose].

The 2008 crisis was a wake-up call

There were many international initiatives following the crisis. South Africa was initially not part of the Financial Services Forum but became a member state. The initiatives of this Forum were adopted and supported. One of the major issues was that banks had to do resolution planning. Banks had to have a “living will”. In many G20 countries there were mandatory annual submissions that SIFIs had to send to regulators which planned for an orderly resolution in the case of failure.

Key elements of the G20 global regulatory reforms

Even though South Africa changed to the Basel Three Framework, it had not really moved on a resolution and deposit insurance framework. In this regard, South Africa was an outlier.

What had been done in South Africa?

Many amendments had been made to the legislation, especially with the 2015 Banks Amendment Bill in response to the African Bank failure to allow for the transfer of assets and liabilities and to separate the entity into a good bank versus a bad bank. There had been framework papers on deposit insurance published.

The 2017 Financial Sector Regulation Act gave the South African Reserve Bank (SARB) the mandate to look at systemic events. The Governor of the SARB had the power to designate which institution was a SIFI.

What problems would be addressed?

Mr Vukile Davidson, Director: Financial Stability, National Treasury, said that South Africa’s financial services were vital to its neighbours, particularly those which were part of the common monetary area. That was why international coordination was a big part of the policy journey so far. National Treasury, through the Financial Sector Laws Amendment Bill, wanted to minimise recourse to public funds to reduce the moral hazard problem of the shareholders of the banks enjoying the profits in good times, but the public suffering the costs of the failures.

A big part of this was planning for failure. Usually, the major financial institutions were complex and had intricate ties to the other international and domestic financial institutions. The Bill would make SIFIs resolvable, thus, to plan for the minimum disruption to the economy in the event of their failure.

To do this, the resolution framework would do four things:

  • it would adopt bail-in, not bail-out, which would identify a set of liabilities on the balance sheet which were designed to absorb losses and take the place of additional funds the public fiscus would have had to commit to ensure stability of the bank;
  • there was the need for proper resolution planning;
  • there was the need for depositor protection and recognition in liquidation, hence, there would be tweaks to related legislation to make this possible; and
  • there was the need for a legal framework that went beyond curatorship and business rescue provisions, due to the systemic nature of the critical functions that SIFIs provided.

Current legal gaps in South Africa

Mr Davidson said the Banks Act only provided for curatorship, which was limited in scope and did not allow for resolution planning. The Companies Act, provided for business rescue proceedings, but did not give due regard to the nature and complexities of large banks which had critical functions of allowing the payment system to continue to operate. The Bill would allow for the operation of critical functions in spite of a banks’ failure.

The Insolvency Act only applied to liquidation and did not recognise depositors as preferred creditors. This was the main thrust of the 2015 Banks Act Amendment Bill, which tried to clarify the creditor hierarchy to ensure that sufficient resources were available to partly protect depositors. This would be entrenched in the law by the Bill.

There was no pre-identified resolution authority with powers to deal with complex financial conglomerates. This was the problem in the African Bank issue, where the problem factor was a furniture business. The links between the bank and the furniture company created problems when trying to resolve the institution. The Bill would provide tools for the regulators to resolve conglomerates.

There was a fragmentation in the law and there needed to be an alignment and co-operation provisions between regulators. This related particularly to the PA in the SARB, the SARB itself, and the FSCA. No legal provision for resolution. There was no legal provision for resolution planning for SIFIs.

Bail-outs were based on a case by case basis and were not in accordance with a uniform standard or principle defined in law. This was another feature that the Bill would introduce. There was a lack of depositor protection in resolution and liquidation. South Africa did not have an explicit, privately funded deposit insurance scheme (DIS). An important aspect of the planned scheme was that it would be privately funded, and would thus be a forced savings mechanism for the financial sector, specifically banks, in case depositors had to be compensated in the event of failure.

The key objectives of the Financial Sector Laws Amendment Bill were thus to provide a framework for the resolution of SIFIs, to designate the SARB as the resolution authority, to create a deposit insurance fund, and to create a creditor hierarchy that further protected ordinary depositors in liquidation. The preference of depositors in liquidation would allow them to benefit beyond the DIS coverage amount. Clauses 1-50 dealt with technical amendments of Bill. Clause 51 contained the resolution and deposit insurance aspects. Clauses 52-61 were the long title and general amendments.

Key proposals of the Bill were to enhance the SARB’s financial stability mandate and expand its objective for depositor protection. The scope of application would be all banks, due to the interconnected nature of banks, with issues of small banks capable of spilling over to large banks and causing a wholesale economic crisis. The stabilisation powers of bail-in, transfer of assets and liabilities as well as the creation of bridge institutions would be made clearer and applied more consistently. The SARB (the Resolution Authority) would be responsible for the development of resolution plans for all SIFIs. There would be safeguards that include the new creditor hierarchy, which contained the no creditor worse off proposal.

The SARB would obtain five powers and functions from the proposed framework:
Firstly, there would be the power to remove and replace management and recover monies from those responsible for the loss. This would reduce the moral hazard of banks taking more risks, because management was given incentives to pursue risks to include the profits of the banks, that would negatively affect the public if the failed. Thus, there would be a claw-back provision.
Secondly, there would be the power to terminate or assign contractual agreements, which would allow financial institutions to identify critical functions and ensure they were resolved in an orderly manner.
Thirdly, the appointment of resolution practitioners with delegated powers. These would be largely akin to the current curatorship powers.
Fourthly, the power to establish bridge institutions and transfer assets and liabilities to enable the continued operation of critical functions.
Finally, the power to take bail-in action, while respecting the hierarchy of claims in liquidation.

The creditor hierarchy currently comprised three levels: the unsecured creditors, which covered ordinary depositors; then preferred creditors; then secured creditors. Currently, if a bank was resolved, ordinary depositors would not be differentiated from other unsecured creditors.

The Bill proposed additional layers to the hierarchy, which would explicitly prefer depositors in the event of a bank failure. At the bottom, there would be a class of regulatory debt instruments which would absorb losses first. There would then be an additional buffer of first loss additional capital (FLAC) instruments. Then there would unsecured creditors. Thereafter, there would be the ordinary depositors’ money, the covered depositors. After that there would be preferred creditors and then secured creditors.

The rationale for the proposed hierarchy was to protect depositors, and align the bail-in sequence for credit losses to allow creditors to absorb losses or have the SARB impose losses on them. Further, the bail-in and creditor hierarchy should allow for orderly resolution, and give due regard to sophisticated creditors, such as larger institutional investors, which allowed for appropriate pricing of risk. Further, the definitive creditor hierarchy would ensure transparency and avoid confusion, as occurred when resolving African Bank in 2015. There was also the need to align the creditor hierarchy with international standards.

Of the summary of the six proposals, the two that had to be clarified was that the regulatory capital requirements were designed to bear going-concern losses, and that regulatory capital had to be available to absorb shocks and losses during normal times and prevent failure.

The Deposit insurance scheme (DIS) would eliminate the risk of depositors losing funds. It would promote the competition of smaller banks, as all banks would provide the same amount of protection; improve confidence; and reduce the risk of bank runs during crises. Further, the coverage of R100 000 was about 95% of the average amount individually deposited. The DIS ensured continued access to funds during bank failures, minimised the risk of contagion to other banks, enhanced South Africa’s market integrity, allowed for smaller bank crises to be better managed, and protected the national fiscus from having to bail-out banks. The DIS put the cost of failures on banks and benefiting depositors instead of taxpayers in general, and provided certainty on guaranteed depositor pay-out amounts and the timing of repayments.

The DIS was to be housed within the SARB. The fund was to consist of premiums collected, deposits by banks and investment returns on these items. The funding level was threefold, consisting of a levy, a premium, and the provision of liquidity to the DIS.

There were three important features of the DIS. Firstly, it would have a single customer view and provide a pay-out to the customer on an aggregated basis if that customer had multiple accounts. Secondly, it would provide limited support for open resolution strategies, where it was less costly for the DIS to provide an amount of funds up to what it would have paid out, and where the resolution strategy was viable. Thirdly, there would be an emergency liquidity facility provided by the SARB in the event of insufficient funding.

In concluding, Mr Davidson said that other countries had to perceive South Africa banks and the regulatory system as safe, otherwise they would impose more stringent conditions on South African banks acting as counterparts. The Financial Sector Laws Amendment Bill would reduce the need for that and was the culmination of all agreed reforms.

Dr D George (DA) said that he thought the DIS was a good idea. He said it sounded like a normal insurance policy, as private entities would pay for it. He asked who would underwrite the fund. If something catastrophic happened and there was not enough money in the fund, who would underwrite it and provide the excess to be paid out?

Mr G Hill-Lewis (DA) said that the presentation put one’s mind at ease. He asked what the maximum covered losses were.

Mr I Morolong (ANC) said he was concerned that the Bill could be counterproductive. He asked if the banks, knowing that there was an insurance fallback, would not act in a more unethical manner. If a depositor had a deposit of R150 000, what would be insurance coverage of that be? Did the introduction of the deposit insurance levy not erode deposit growth? If the members funded a percentage of the DIS, would banks not pass on the cost of insurance to all customers?

The Chairperson asked if the determination of some banks being too big to fail implied that big banks would be supported and small banks neglected as they could fail without major issues? Was this why government was not interested in assisting banks like VBS? He said he was not comfortable with this statement by government and it should go to Parliament. It was being implied that government would protect monopolies only. Could context be given for the writing of this?

Mr Momoniat said that the questions touched on precisely the issues that National Treasury worried about. In response to Mr Morolong’s questions, he said this was the dilemma in all countries. There were systemic banks, but even smaller banks posed systemic problems. Moral hazard meant that banks started taking more risks knowing that government would bail them out. That was gambling. If the risks worked, private shareholders made money and senior management got big bonuses, but if the risks failed, the banks had a gun to the government’s head, because the impact of failure would be worse on the poor. Any banking system had privatised profits but socialised failures.

To prevent banks from taking more risks, banks had to regulate intrusively, intensively, and more effectively. The PA, for example, would thoroughly analyse business models, ensure that management members were fit and proper, end ensure that the banks met anti-money-laundering laws. When there was a banking failure, the question was: Were the regulators doing their job? Whenever there was failure, an independent inquiry into the fault was also conducted. If the fault was with the institution, were the regulators sleeping or not? There had to be competent regulators in place to mitigate risky behaviour. Even without this legislation, the risky behaviour was there. All the law did was try to regulate it.

On the DIS, everyone would pay towards the fund. At the start, the fund would be small, but it would grow. On bailing-out banks, he said that at the moment no banks had been bailed-out, whether big or small. When banks got into trouble, they went into curatorship. For VBS, it was not that government did not want to save it. Rather, the problem was that when VBS was placed in curatorship, the aim was to save bank, but then the extent of fraud was discovered and the fact that there were no funds. This meant that VBS had to be liquidated. When a bank was in trouble, it was hoped that investors would come in to buy the failing bank. The issue with banking was that one could not borrow funds from one bank to buy another bank. One would have to have sufficient capital on hand to buy a bank.

It would be better to have more competition in smaller banks. There was a lot of monitoring on how banks were regulated. The FSB/FSCA had the mandate to do so, and the Basel process also had peer-review process. A recent report of the International Monetary Fund (IMF) indicated that the South African financial system had higher risks because of the interconnectedness of institutions in the financial sector. The issue was not government would not save small banks. In fact, the DIS would be much better for smaller banks, because the big banks would pay to the fund which would also be used to save small banks. This reduced the risk to the fiscus and made the saving of banks more possible.

The issue was not to protect monopolies. But governments would step in to save big banks because the failure of big banks would be catastrophic. The eurozone crisis started in Iceland. The failure in Greece also resulted in severe poverty and recession. Regulation had to be done intensively, otherwise obvious mistakes, that should have been picked up, caused major problems.

Mr Davidson said that the coverage amount was R100 000 per customer, per bank, on a single customer view basis.

Mr Hendrik Nel, Head: Financial Stability, SARB, said that the DIS was an insurance-type scheme. On the question of who would underwrite the DIS if there were insufficient funds, the DIS funding would have three layers. Firstly, there would be premiums from the banks. Secondly, there would be a liquidity layer of deposits from each member bank with the corporation for deposit insurance. Thirdly, there was a guaranteed emergency fund provided by the SARB if the funds were not enough.

The coverage amount of R100 000 was intended to protect ordinary depositors, not corporate depositors. A recent survey indicated that approximately 87% of qualifying depositors in South Africa had deposits of less than R10 000. Thus, the R100 000 would cover more than 90% of depositors.

The banks would, indeed, pass on the costs to customers. However, it was not prescribed how banks would recover the funds from depositors. It was estimated that the average cost per deposit of the DIS would be around R7 per depositor, according to a 2015 survey.

Responding to the concern that the DIS would be counterproductive and cause moral hazard, Mr Nel said there would be limited coverage that would not allow large depositors to obtain this guarantee, so it would not cause moral hazard. It would not erode potential growth, as the DIS would reduce the burden on banks, especially through the design of the funding structure.

The Chairperson said that the monopoly of the financial sector would have to be discussed at some stage. The entry of small players was made very difficult by the requirements of the SARB. The transformation of the sector would have to be discussed. The previously disadvantaged had to be capable of becoming big players in the sector. He said he understood the discussion of the regulations, but real transformation would have to be discussed. This should occupy the agenda.

Pension Funds Amendment Bill [B30 – 2020] presentation
Dr George said that he had drafted the Pension Funds Amendment Bill. Pension funds were an important financial asset, where the primary purpose was to provide members with security. Pension funds played a crucial role in the economy and had approximately R4 trillion in assets.

Pension funds could already be leveraged, in that the Pension Funds Act allowed funds to offer pension-backed home loans. Trustees decided whether a fund would make this facility available. There was a discussion around the trade-off of using the assets to live better now or to live better after retirement. It worked by allowing a member to borrow from a financial institution to buy a home or make home improvements and repay the loan via a salary deduction. As the loan was fully secured, the member should enjoy a more favourable interest rate and the financial institution should be comforted that the loan would not become a bad debt. Further, no withdrawal was required, and the pension assets remained invested.

The Amendment Bill would remove restriction of the loan for the purpose of only purchasing or improving a home. There would be a 75% limit of the fund value for the loan. Trustees would still decide if they wanted to offer the loan and limit the loan. The financial institutions would decide if they wanted to offer the loan. Hence, it was similar to the current mechanism, but without the purpose restriction.

The Covid-19 pandemic highlighted the role of pension funds in the finances of members, and that compulsory saving to a pension fund was crowding out shorter terms savings. The principle underlying the Amendment Bill was that members should have a choice of accessing their pensions when they need to. The pandemic showed that many members resigned to access their pensions and paid tax on that withdrawal. Further, members also faced severe current hardships despite owning a valuable financial asset.

The discussion on pension reform had remained in progress for 15 years. The Bill received 346 comments from public participation. Many submissions were in favour of the amendment, but some industry bodies and funds were not. The key concerns raised were that pension reform was already in progress and there would be heightened expectations, there would be an increased administrative burden, and there was currently a high level of indebtedness.

Dr George asserted that the Bill did not have to be part of the process involving National Treasury, industry, and labour on pension reform. The Bill was focussed on a member being able to leverage their own money when they needed it; thus, to be able to choose. On the administrative burden increasing due to fund administrators having to expand administration to facilitate the loans, this would depend on whether the loans were offered. If the loans were not restricted to home purchases or improvements, the administration of the process would be easier, as no document of proof that loan was for home was needed.

On the argument that members were already highly indebted, the National Credit Act already imposed restrictions. The Bill did not imply that those restrictions would not apply. However, not everyone was over indebted. The argument could not be that everyone was in the same boat. If people had borrowed money with an excessive interest rate, perhaps the pensions would be capable of being leveraged to get a softer interest rate. Heightened expectations of members would have to be managed.

In conclusion, Dr George said that the Bill was not designed to solve economic crises, but it was a step in the right direction. Not every fund would offer loans and not everyone would qualify, but some members will. So, should members be able to leverage their own financial asset for their own benefit? The Pension Funds Amendment Bill said yes, they should.

The Chairperson asked if National Treasury had any comments that would not influence the decision-making of the Committee.

Mr Momoniat said that National Treasury had a detailed presentation on pension reform which could be presented at a later date. However, the biggest issue was that South Africans did not save enough. One had to be careful not to throw the baby out with the bath water. Many South Africans were over indebted. In a sense, retirement savings were forced on people to have a better retirement.

The retirement reforms that started in 2011 were designed to deal with many problems. The biggest of these was that members did not preserve their funds over time. There were gaps that existed which allowed people to cash out their pensions as soon as they resigned, before moving to another job. That gap had to be closed. While there was a role for limited withdrawals, reforms had to be made to close these gaps.

There had been abuse where funds allowed borrowing. National Treasury had had engagements which made it clear that there was no easy way out of this situation. It was believed that the Pension Funds Amendment Bill would invite more problems in his view, so National Treasury had big concerns.

The Chairperson said that National Treasury would be allowed to make submissions in this regard at the right time.

Dr George said that he looked forward to further discussions, because this issue was not an easy one. Regardless of what happened with the Bill, the matter had to be brought to the forefront and be dealt with, as it was very important.

Fiscal Responsibility Bill [B5 – 2020] presentation
Mr Hill-Lewis said that the Fiscal Responsibility Bill would introduce, for the first time in South Africa, a statutory fiscal rule. A legislative fiscal rule/anchor was a budgetary rule that every government had to comply with, which required responsible budgeting behaviour. This fiscal rule was specifically aimed at containing national debt and debt service costs.

This focus was needed because debt was the most tempting thing for any government, due to a relentless political pressure to spend more money. It could not be left to future governments and leaders to pay off that debt. The debt trap was a serious challenge. The Fiscal Responsibility principle was for all governments, present and future. Debt should not be allowed to become a tool of political pressure. Debt was like an economic drug. Thus, it was useful to have a legislative fiscal rule to stop that.

Statutory fiscal rules were being adopted globally, even in middle-income countries like South Africa with similar problems. The Organisation for Economic Co-operation and Development (OECD) recommended the adoption of these rules as they contributed to economic growth. This idea had been pursued to ensure the sustainability of the national fiscus, in addition to the expenditure ceiling. The current fiscal rule of the expenditure ceiling was very loose.

National Treasury had previously supported the proposal for a new fiscal rule. Its response made it clear that a new fiscal rule would require accompanying institutional reforms, such as passing the law in Parliament to make it binding and including escape clauses for extraordinary unforeseen crises. That was basically what the Fiscal Responsibility did.

Mr Hill-Lewis said that South Africa was in a debt crisis. By the end of the current medium term expenditure framework (MTEF), South Africa would be in R5.3 trillion in debt and would be spending R338.5bn a year on interest. This would be R60bn more than on basic education, R80bn more than on health, R90 more than on social grants, triple the policing budget, and seven times the defence budget. Interest would be the biggest item on the budget, bar salaries.

In 2021, there were real cuts to basic services. It was no longer possible to pay for interest on debt along with basic services. The one was crowding out the other, which led to a statement questioning if the budget was constitutional. Debt expenditure was undermining the caring of the vulnerable in society. This could not continue. If the current growth revenue and debt targets were met – this was a very big if – debt would stabilise at 89% of the gross domestic product (GDP) in 2025. The IMF recommended that middle-income countries should have debt below 50% of the GDP. This meant that South Africa would be 39% worse off.

Where the danger of debt had been expressly made clear, there was still political pressure to spend more. The Fiscal Responsibility Bill would remove pressure from the government as it would provide a legislative fallback for why there could be no extravagant spending.

The Fiscal Responsibility Bill provided a fiscal rule prescribing that for each financial year, the consolidated net loan debt expressed as a percentage of the GDP could not be more than it was in the previous year. This did not mean that government could not borrow, as redemptions could be rolled over and the economy grew.

There would also be a fiscal rule prescribing that for each financial year the aggregated government guarantees could not be more than they were in the previous year. It would also prescribe that the rules would be reviewed by the National Assembly (NA) every four years, by either amending, renewing, or terminating fiscal rules.

It would also provide for an exemption to the rule to be granted by the NA upon application by the Minister with good cause and on the recommendation of the Committee. An example of an emergency would be Covid-19, for which R779bn was borrowed. Further, the Minister would, be required to table an annual Fiscal Responsibility Report when tabling the Budget.

Common objections included the idea that the rule would unfairly constrain government’s fiscal policy. Fiscal policy space could expand with economic growth because growth led to an increase in revenue. This was because growth was strongly correlated with sustainable debt management. The Fiscal Responsibility Bill would expand fiscal space by underpinning sustainable growth by managing debt. The government’s ability to engage in irresponsible behaviour would be limited, with allowances for special circumstances. Tax revenue was key to fiscal policy, not debt. Research showed that current global fiscal rules were too loose or weak to constrain debt, like the debt ceiling in the United States of America. Nearly every year, Congress found a reason to increase the debt ceiling in the United States of America. Even if a fiscal rule was only symbolic, it was important as a signal that the government was committed to fiscal and debt sustainability.

In conclusion, Mr Hill-Lewis said the Fiscal Responsibility Bill would help to get national debt under control, restore confidence in the South African economy, and restore the sovereign credit rating. Further, it would ensure that future generations were not hobbled with trillions in debt, higher taxes, and lower growth, it would prevent a full-blown sovereign crisis, and stop the loss of sovereignty to international lending institutions.

Mr Edgar Sishi, Acting Head: Budget Office, National Treasury, said that for some years there had been an expenditure ceiling fiscal rule. This rule was a guideline. It was true that that rule had weakened over time. The financing arrangements had become a de facto fiscal rule. There was a rule on how much foreign currency could be borrowed versus local currency.

He said that in the present year, 88% of government spending was financed by taxes; the other 12% was financed by debt accumulated over the years. The rule obligating the borrowing of mostly local currency had protected the country from the effects of fluctuating exchange rates. Fiscal rules were important, but did not replace the need for basic fiscal discipline. The fiscal marksmanship of government had to be improved. If there was a statutory rule, and fiscal targets were missed, the consequences would be worse. Fiscal discipline had to be maintained.

Any rule should consider a turnaround in the economic cycle. When a rule was set, and the economy started to grow, there was a temptation to spend up to the prior limit. There had to be a mechanism to limit and regulate that. A badly designed rule could promote irresponsible and wrong expenditure.

Mr Sishi said that the composition of spending in South Africa, and other countries, was to some extent a function of the protections that some items of spending enjoyed. There were strong institutional protections for the items on the wage bill, but there were none for infrastructure or maintenance. This results in money being taken from those budgets to pay wages. One had to be aware of an unintended consequence, that when there was a rule that had to be complied with, the unprotected budgetary items were shifted to stay below limits. There was a problem of institutional protections that had to be addressed simultaneously.

He said that National Treasury had discussed fiscal anchors for a long time, since even 2009. One of the things that was consistently indicated was that to build a credible rule there had to be strong institutional arrangements. There had to be institutional protections of rules that were being put in place. These arrangements had to be utilised and be capable of giving advice when changes were made. That was not part of the Fiscal Responsibility Bill but was part of prior discussions.

Mr Hill-Lewis said he was shocked to hear that fiscal rules had been in discussion back in 2009 when debt was only 20% of the GDP. He said that it was never too late to do the right thing.

The Committee Secretary announced the agenda for the coming Wednesday meeting.

The Chairperson thanked everyone for participating in the meeting.

The meeting was adjourned.


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