Fiscal Responsibility Bill: legal briefing and discussion of public submissions

Meeting report

The Chairperson said that the Committee would receive a briefing from parliamentary legal services on the Fiscal Responsibility Bill. Thereafter, the Member who had sponsored the Bill, Mr G Hill-Lewis (DA), would respond to the submissions, and the Committee would discuss the Bill.

The Committee secretary noted an apology from Mr N Kwankwa (UDM). 

Legal briefing: Public submissions on the Fiscal Responsibility Bill

Adv Charmaine van der Merwe, senior parliamentary legal adviser, reported to the Committee on legal issues arising from the public hearings on the Fiscal Responsibility Bill. Only one organisation – the Congress of South African Trade Unions (COSATU) – had raised legal concerns. The other public submissions had focused on policy matters, which she would outline briefly.

National Treasury 

Adv van der Merwe said that National Treasury did not support the Bill. Its reasons were:

• Under current circumstances, the Bill might worsen the conduct of fiscal policy;

• There was no technical justification for the proposed rules;

• The coverage of the rules was insufficient; and

• Other approaches were being followed to ensure fiscal health. 

Parliamentary Budget Office

The Parliamentary Budget Office (PBO) also did not support the Bill. Its reasons were:

• The Bill failed to provide evidence that the rules would ensure fiscal responsibility;

• The rules depended on variables outside of government’s control (nominal gross domestic product and the exchange rate); and

• The rules could cause government expenditure to become uncertain and volatile, and could negatively affect planning – which, in turn, could negatively impact fiscal credibility. 

SAICA

The South African Institute of Chartered Accountants (SAICA) supported the Bill. However, it noted that the Bill contained superfluous definitions, and that the Bill would require proper enforcement and political commitment. Adv van der Merwe said that these comments could be addressed during deliberations, and did not affect the desirability of the Bill as such.

Free Market Foundation

The Free Market Foundation supported the Bill, and proposed various additions that could strengthen the Bill and lead to more sound fiscal behaviour. Again, Adv van der Merwe said that any potential additions could be considered during deliberations.

Business Leadership South Africa

Business Leadership South Africa also supported the Bill, pointing out that New Zealand, Australia, Brazil, and India had successfully implemented fiscal responsibility laws. It agreed with the Free Market Foundation that the success of the legislation would require a broad political consensus and commitment.

COSATU

COSATU opposed the Bill. It worried that the Bill would collapse public services, because of its focus on the public service wage bill. It acknowledged that a debate on public debt was needed, but held that the Bill’s proposals were not constructive.

COSATU also raised constitutional concerns, on the grounds that the Bill: 

• Limited the right to collective bargaining, by compelling the state to impose brutal wage cuts; and

• Had not been referred to the National Economic Development and Labour Council (Nedlac) or to bargaining councils like the General Public Service Sectoral Bargaining Council.

However, Adv van der Merwe said that the Bill was not unconstitutional in either respect. First, the Bill did not affect collective bargaining, but rather would become one of many factors that influenced the wage bill. Second, the Bill was not labour legislation, so it did not have to be sent to Nedlac, and the Committee could in any case decide to invite comments from Nedlac at a later stage. 

Adv van der Merwe concluded that she had no legal concerns about the Bill. Policy factors, not legal factors, should decide the Committee’s position on the Bill.

DA responses to public submissions

The Chairperson had been disconnected from the platform, but Ms P Abraham (ANC) suggested that Mr Hill-Lewis should comment on the public submissions on the Bill, which he had sponsored.

Mr Hill-Lewis said that there was a fiscal crisis which, despite Treasury’s efforts over many years, had drastically escalated. The only reason that there had been a slight easing of pressure this year was that a rise in precious metal prices had delivered a short-term windfall. People should not be lulled into a false sense of security by the hope that the windfall was permanent – there was no such thing as a permanent windfall. Even with this windfall, the country was severely and increasingly indebted, with no sign that it was going to reverse the “very dangerous” debt curve.

The debt curve needed to be turned around if the country’s finances were to be saved. The Committee had a responsibility to ensure that it did everything it could to prevent a full-blown sovereign debt crisis, which would be devastating for the country. It would be particularly devastating for the poor, because it would lead to drastic cuts in government spending on basic services. Members of Parliament had a moral and professional responsibility to hold the executive to account and to do something about the situation. 

In its submission, Treasury had claimed that the crisis was being addressed by other mechanisms. Yet the Treasury’s record over the past ten years was not very good at all. In fact, Treasury was “very, very bad” at ensuring that the fiscal situation was sustainable. The question was what new measures could be introduced to ensure fiscal sustainability. On many occasions, the Treasury had mentioned the prospect of imposing fiscal anchors. In fact, the former Minister of Finance, Mr Tito Mboweni, had referred specifically to fiscal anchors in his very first budget speech. He had said that South Africa had to seriously consider stronger fiscal anchors to stop the “fiscal slide.” Frankly, that was what had inspired this Bill. There was apparent consensus that the country needed stronger fiscal anchors so that it did not go over “the fiscal cliff” and so that it avoided a sovereign debt crisis. Yet then where were these fiscal anchors that Treasury spoke of? It had not introduced any such mechanisms in the last three years. Treasury spoke of them, and even mentioned such “fictitious, mystery” measures in its submission on the Bill, but there was no concrete information about or evidence of such measures.

Mr Hill-Lewis said that the principle of the Bill was that South Africa needed a strong fiscal anchor to exert pressure on Treasury, and on the rest of government, to exercise responsibility in financial management. The current situation – wherein South Africa faced the prospect of “financial oblivion” due to irresponsible spending over many years – could not be allowed to continue. Strong fiscal anchors were needed to turn the fiscal situation around and prevent it from deteriorating to this extent ever again. That was clear from the numbers.

Mr Hill-Lewis was committed to the principle at the heart of the Bill. However, there was a distinction between a principle and the technical achievement of that principle. If Treasury or another party was unhappy with the metrics or technical tests proposed in the Bill, he was open to considering amendments. He would be very happy to consider any proposals from Treasury, provided that the Bill continued to pursue the same outcome and work to the same principle.

Mr Hill-Lewis said that he would not elaborate further, because most of the other public submissions had been supportive of the Bill.

Further input from Treasury on the Fiscal Responsibility Bill

The Chairperson invited Treasury to raise further technical points or make further comments if it wished to, and invited PBO to contribute as necessary.

Mr Edgar Sishi, Acting Head: Treasury Budget Office, said that Treasury welcomed attempts to address the fiscal imbalances. In a presentation to the Committee in May, Treasury had said that it was willing to engage with Parliament on fiscal matters, and to work on related technical issues.

Treasury wanted to reiterate three central points on the Bill, one of which had also been raised by the PBO. First, any fiscal rules had to be preceded by measures to address current fiscal risks, such as the “huge” liabilities arising from state-owned enterprises. It was important for all stakeholders – including both ordinary South Africans and the markets – to have confidence that fiscal risks had been minimised and that the government’s balance sheet was stable and sustainable. Without this, fiscal rules would not be credible, even if they were legislated. It had been observed in other countries that implementing rules without solving the underlying fiscal problems led to a “scramble” by government – and even by the legislature – to escape those rules. Treasury did not want this, because it wanted any rules and any fiscal responsibility legislation to be effective. The underlying fiscal problems were primarily the responsibility of the executive to sort out, but, until they were solved, they would undermine the impact of legislation.  

Second, it was not correct that the country did not have fiscal rules – there was a spending ceiling in place. Treasury agreed that the spending ceiling had been nowhere near as effective as hoped. But this was largely because of events outside the direct control of the fiscus – particularly South Africa’s poor growth performance over the last six or seven years. Gross domestic product per capita had declined every year for the past six years, and the South African economy had underperformed relative to its peers. On average, South Africa’s growth was about three or four percent lower than that of other emerging markets. That additional four percent would have made a significant difference – it probably would have ruled out the need to have this conversation at all. So Treasury agreed with the PBO that slow economic growth had contributed to the country’s current fiscal position.

Third, Mr Sishi said that Treasury often did a lot of work on legislation introduced by the executive, especially in identifying the potential impact of any proposed rules. It conducted socioeconomic impact assessments, which would be important in this case – given that in this financial year, most of the government spending envelope was going towards social services. Any new rules could precipitate sudden adjustments in spending, and, before Mr Hill-Lewis’s proposal went forward, it was important to investigate how such adjustments might affect social services.

Discussion

Dr D George (DA) said that he was confused about Treasury’s input. Mr Hill-Lewis had been very clear. As he had said, there seemed to be consensus that there was a threat of a sovereign debt crisis, and that fiscal responsibility was called for. Everybody seemed to agree on that. What was not agreed on, apparently, was how fiscal responsibility should be achieved. The rules that Mr Hill-Lewis proposed were sensible ones. Treasury had acknowledged the problem and the necessity of rules, and had provided input on technical issues. But it had not addressed Mr Hill-Lewis’s very clear question: what was Treasury’s alternative? If Treasury opposed the rules or approach of the Bill, then Mr Hill-Lewis was open to considering Treasury’s alternative proposal. In Mr Sishi’s response, Dr George had heard “a lot of jargon, but not much substance.” He wanted clarity on Treasury’s proposal for a way forward.

Mr Sishi replied that Treasury believed that fiscal rules were necessary, and had been working on a set of fiscal rules. But it did not believe that the current Bill would address fiscal problems in the way Mr Hill-Lewis hoped it would. There were underlying fiscal risks and problems that had not been addressed, and which the Bill could not address. When those risks materialised, they would create a secondary fiscal crisis, which the Bill would not ameliorate and which the Bill might in fact exacerbate. This was because the Bill would require spending cuts even more dramatic than those contained in this year’s budget – and those cuts had already been “quite tough.”

Mr Sishi said that Treasury proposed that two things had to happen. First, there needed to be a solid plan to address the fiscal risks. Such a plan had to be enacted before, or at least alongside, any fiscal rules or legislation. It was necessary to build confidence in the credibility of the rules. The risks emanating from the state-owned enterprises, in particular, would counteract the Bill’s objectives, and those risks had to be addressed directly. Second, socioeconomic impact assessments had to take place, since the Bill required spending adjustments that might have a socioeconomic impact.

Mr Sishi said that South Africa’s fiscal problems were considerably more complex than could be tackled simply by imposing a rule which instated a ceiling on the net debt level. This year’s budget worked towards building up credibility around the country’s approach to its fiscal risks. The budget sought to close the fiscal imbalance over the next four to five years. However, the executive still had a lot of work to do – it had to make firm decisions about what to do with the state-owned enterprises and the associated risks.

The Chairperson asked what the next step was. Would the Committee consider the Bill clause-by-clause?

Adv van der Merwe replied that the next step was for the Committee to consider the Bill broadly, alongside the public submissions. If the Committee agreed with the policy direction of the Bill and wished to proceed, it had to adopt a motion of desirability. If the Bill was found desirable, the Committee would then proceed to clause-by-clause deliberations, during which amendments could be made to the Bill. If the Committee did not adopt the motion of desirability, a report to that effect would go to the House.

Mr Hill-Lewis said that he and Mr Sishi could go on debating about the Bill indefinitely. However, he did not see the merit in Mr Sishi’s objection about underlying fiscal problems and risks. It was true of every rule in law that the rule did not solve the underlying problem that necessitated it. So it was obviously true that the Bill did not solve the underlying fiscal problems. But doing so was not the purpose of the Bill. Government had to address the underlying fiscal problems. In the meantime, the rule provided a hard cap on debt, thus applying pressure on government to address the underlying problems. It provided an incentive for proper, responsible behaviour.

On the possible harm of large spending cuts, Mr Hill-Lewis said that the Bill had been drafted more than two years ago – it took a long time for a draft Bill to be reach a parliamentary committee. The metrics in the Bill dated back from then and, at that time, complying with the Bill would not have necessitated such drastic spending cuts. The metrics could be amended to ensure that the Bill did not cripple the public service. Yet the fact that complying with the same rule would now require large spending cuts, when it would not have two years ago, underscored why the rule was necessary. It proved that the fiscal situation was out of control, despite Treasury’s good efforts. The situation had not abated, let alone been turned around. 

Mr Hill-Lewis said that this in turn showed that even if Treasury was quietly implementing mysterious fiscal anchors, those measures were not having the desired effect. There had to be a broad and explicit commitment, with the whole of government agreeing “this far and no further.” That would send a healthy signal. Of course, it had to be credible. But he disagreed with Mr Sishi’s “defeatist reasoning.” It did not make sense for government to refuse to try imposing rules just because it did not expect its rules to be credible. He reiterated that he was prepared to discuss amending the metrics, bearing in mind that the Bill had been drafted in a very different fiscal situation. Yet, as Mr George had asked, if Treasury disagreed with his proposal, where was its proposal? “Put it on the table.” Debt had not stabilised – it continued to grow even under the new budget and with the recent commodities windfall. There was a plan for debt stabilisation, but it had been around for ten years and had not worked. There needed to be a hard rule.

Finally, Mr Hill-Lewis said that Mr Sishi’s suggestion for a socioeconomic impact assessment was just “a delay tactic.” It was a way of “kicking the can down the road.” Many pieces of legislation – including bills proposed by the executive – came before Parliament without socioeconomic impact assessments. Most significantly, there had been no socioeconomic impact assessment whatsoever on the constitutional amendment currently being considered by Parliament. This was the case even though the constitutional amendment would affect private property rights, and thus would clearly have a direct and significant economic and fiscal impact.  

Closing remarks

The Chairperson said that the Committee would move on to the next stage of processing the Bill. The Committee secretariat and parliamentary legal services would guide the process. Ms van der Merwe had already indicated how the processing of the Bill would move forward.

The Committee secretariat said that the Committee would meet on Tuesday and Wednesday next week to hold hearings on the three tax bills. Members would receive the relevant documents later in the week.

The Chairperson thanked everyone in attendance.

The meeting was adjourned.