2021 Revised Fiscal Framework & MTBPS: National Treasury response to public submissions

Meeting report

Chairperson Njandu said public hearings were held on 17 November 2021. There were oral and written submissions from different stakeholders. National Treasury was present at the current meeting to respond to the submissions.

National Treasury (NT) responses  

Mr Edgar Sishi, Chief Director and Head of Budget Office, National Treasury (NT), said the main comments made in the submissions included economic growth and reforms; revenue and tax proposals; expenditure; and fiscal policy. Most comments made were similar to the comments made during the February Budget.

He said more debt-funded spending does not result in more growth. Low potential growth limits the scope for stimulus. A significant portion of the fiscal framework is dedicated to the social wage. The composition and efficiency of government spending is critical to improved growth outcomes. The structural weaknesses, unreliable electricity, high concentration levels, high costs of doing business, and excessive red tape limit the rate at which the economy creates and grows jobs. It sets out the short-term, medium-term, and long-term structural reform agenda. There is expenditure pressure regarding the social grants, especially since over 46 percent of South Africa’s population receives a social grant.

On the improvement of spending efficiency and capacity, he said Treasury continues to expand the tools available for provinces and municipalities to improve spending and build capacity.

Parliamentary Budget Office (PBO) responses

Dr Dumisane Jantjies, Director, Parliamentary Budget Office (PBO) said the PBO requested a meeting with National Treasury to discuss some of the differences in thinking. There are a lot of disagreements when it comes to economic concepts, but there is understanding and this is the most important thing. The downplay regarding the textbook definition of tax is concerning and does not assist the conversation. The high level panel, led by former President Kgalema Motlanthe showed evidence of poverty and inequality worsening in South Africa after fiscal consolidation was implemented. Any policy adopted by government must be supported by a social impact study or evidence which will show the implications of the policy in society. So far, there has been no contradictory evidence against the high level panel report. The PBO has never been against any structural reforms but the demand-side must be complemented. Fiscal policy has to support recovery and also areas which will be important on the productive side of the economy. South Africa’s social spending is far less than some countries with higher rates of inequality. There needs to be more comparative analysis to support policies. There has been global consensus about the importance of the role of the State in responding to and supporting countries during and in recovery from the Covid-19 pandemic.

Mr Seeraj Mohamed, Deputy Director: Economics, PBO, said during a crisis the role of the state in assisting with recovery and stimulating the economy is important. It is problematic when National Treasury believes recovery and stimulation is happening when it is not. It shows the major differences in economic thinking between the two entities. The word ‘crowding-out’ has become an overused word by National Treasury and is used when mentioning the debt repayments and increased government borrowing from the private sector. The idea of how the economy operated is based on a view which originated in neo-classical economics. Textbook views are problematic. National Treasury needs to rethink the role of the State in the economy, and also what ‘crowding-out’ really means. On the structural reforms, he said National Treasury has not analysed or understood the structure of the problems of the economy. Private companies choose not to invest its money. If poor households were given more money, then production of less energy/labour intensive goods would increase. He said thinking about broadening the tax base is problematic because South Africa has high levels of inequality, so higher taxes should be on the rich.  

Amandla.Mobi responses,

Ms Tlou Seopa, Campaigner, Amandla.Mobi said Amandla.Mobi’s proposal is simple; to tax the rich to help the poor. Amandla.Mobi noted the comments on taxes by Treasury, and said there has always been a compelling reason to increase taxes, especially with the poor conditions people, especially women and children, live in. National Treasury also failed to mention the R3 billion additional funding to South African Revenue Services (SARS) was not only to modernise and improve compliance, but to investigate the introduction of the wealth tax as per the recommendations of the Davis Tax Committee (DTC) report.

There are hopes National Treasury is not trying to derail the wealth tax the same way it tried to derail the extension of the R350 grant, by secretly proposing a family grant which would go to the head of a household, and would also exclude millions of people. South Africa is one of the most unequal countries in the world, so there is immense wealth and extreme poverty. The rich should be taxed to fight poverty. The Treasury presentation said if poor job creation continues, it will become a serious concern for the fiscal position. The reality is poor job creation has been happening for years. The public cannot guarantee it will not continue. National Treasury cannot be held accountable for all the issues in the country but it can be held accountable for financial issues, because Treasury’s budgets and engagements with the public are anti-poor. Treasury should try and make public comments accessible because many of those who are impacted by the tabled budgets do not have access to these spaces. She asked how Treasury will ensure public consultations are accessible to every citizen of South Africa. It would be pleasant if a free line for public comments was made available to citizens during the time of the Budget adoptions. Hopefully National Treasury will use the power it holds to urge government to make decisions which will help the poor by increasing grants and taxing the rich.

Healthy Living Alliance (HEALA) responses

Mr Nzama Mbalati, Head: Healthy Living Alliance (HEALA), commended National Treasury on the submission of the Health Promotion Levy, although there was not enough detail given on what this levy means. During the last submission, National Treasury committed to undergo the evaluation of the Health Promotion Levy. Mr Mbalati asked if the process started and if the levy will be discussed in the 2022 February mid-term Budget speech. HEALA supports the evaluation and welcomes any engagements with Treasury on HEALA’s input regarding it. Through the Health Prevention Levy there is an opportunity to impact South Africa’s Obesity Prevention Strategy. The hope is the front of package warning labels will be regulated to define healthy foods. This will increase Treasury’s anticipated support of the Health Promotion Levy level to 20 percent, and also expand the levy to other products.

South African Breweries (SAB) response

Ms F Banda, SAB, noted disappointment about National Treasury not providing specific details and responses to the submissions made by SAB on Wednesday. A general response was given in relation to the excise tax and tax outlet. SAB is aware National Treasury indicated taxes and tax prescriptions were made in the Budget, but reference was made to the tax outlet. SAB specifically asked National Treasury to respond to page 70 of the Medium Term Budget Policy Statement (MTBPS), which outlines excise taxes as rebased away from the Consumer Price Index (CPI) towards household consumption growth. SAB wanted to know the reasons for this rebase.

On page 30, SAB also asked if all tax categories were able to recover. It wanted to know if gross tax revenue, except for specific excise duties, went back to 2019/2020 levels. Specific excise duties are a direct consequence of the beer industry being affected by 161 days of being banned, and the effects of demands as a result of the pandemic. SAB made a capital investment of R2 billion into 2022, but National Treasury has not provided details on the structural reform plans to close out beyond what is being done to reduce the bottlenecks. National Treasury has also not provided details on the implementation plans to help businesses, and not enough information is provided by the MTBPS.  

Organisation Undoing Tax Abuse (OUTA) response

Mr Matt Johnson, Parliamentary Engagement Officer, OUTA, agreed with the state of senselessness in the expansionary fiscal policy in the current situation of structural constraints. He said if something is not done, properly increased expenditure would fuel corruption and misspending. There is a limitless list of programmes where there is significant corruption and maladministration, where money is being wasted. There is agreement about the tax base being increased to ensure there are more employed people who are liable to pay tax and to reduce inequality, instead of taxing the rich and handing the money over to the unemployed as if the current unemployment rate needs to be sustained.

There are small taxes placing a burden on people. These include the fuel tax, e-tolls imposed by the Road Accident Fund. South Africa is a highly taxed country where there is a small pool of taxpayers and increased population of unemployed people. He supported the statement that spending over the past ten years has not led to increased growth, but has also not let to increased service delivery outcomes. This is problematic. He welcomed the initiative where government extended a heavy support package to address the impact of Covid-19. Tough decisions have to be made regarding reprioritisation, and these decisions have to be made urgently, so further details on the upcoming Budget for February 2022 can be clear. He said it is not difficult to see where money is being wasted and to reallocate existing items of expenditure, where there is an outcome and a public benefit.

On the aggressive implementation of the Public Finance Management Act (PFMA) and the Municipal Finance Management Act (MFMA), he said he welcomed it and hoped the impact will be evident. Civil society must be invited to assist in monitoring provincial and municipal spending. More details are expected in relation to structural reforms mentioned by National Treasury, because actions speak louder than words.

South African Institute of Chartered Accountants (SAICA) response

Ms Sharon Smulders, Project Director: Tax Advocacy, SAICA, said on the increase of tax rates, SAICA supports the broadening of the tax base and for taxes to be paid where it is supposed to be. SAICA asked for additional SARS from SARS because the R3 billion provided was not enough. The number of taxpayers is increasing, but the number of people paying is seven percent and the rich are leaving the country and moving money off-shore. The problem is not the revenue. If tax is broadened then tax evasion is decreased, which solves the problem, but the main issue is the spending. The spending on infrastructure rather than compensation spending is welcomed, and the large support package given by government to individuals and entities is also appreciated, but most of the spending went to corruption. Spending more increases debt because the money is spent in the wrong places.

Almost half of South Africa’s population relies on social grants, which is difficult for a tax payer base to sustain. This is why employment must be increased. To achieve this, government needs to spend efficiently. The lack of economic growth is serious. She appreciated the statements National Treasury made on consequence management. Section 216 of the Constitution outlines National Treasury’s role in ensuring all government entities enforce fiscal discipline. Ms Smulders asked about the plans for implementation.

National Treasury mentioned zero-based budgeting and consequence management, but nothing was said about the R50 million spent on the Revised Performance Management System and the plans in this regard. National Treasury did not mention the issue of unbudgeted amounts and Ms Smulders asked for clarity on this. Contingent liabilities of State Owned Enterprises (SOE’s) were not mentioned, and there is no detailed action plan offered by National Treasury. Businesses and investors need certainty. There must be concrete evidence and plans pointing in a specific direction. She asked for detailed action plans on the structural reforms.

COSATU response      

Mr Matthew Parks, Deputy Parliamentary Coordinator, COSATU, said there are agreements with government, for example the Manageable Debt Direction, Efficiency and Expenditure, Network, and more, aimed at achieving economic growth and aimed at challenges such as the large amount of money spent by government on social grants. The main challenge which should be addressed is the high unemployment rate. The main challenge as determined by government seems to be the expenditure level, and nothing is mentioned about the recession, the unemployment rate which keeps increasing, thousands of company closures, the high levels of corruption, wasteful expenditure, as well as the resolutions on SOE challenges and local government. Challenges require a multi pro-longed approach, instead of praying for a miracle. Government is willing to engage with the Public Service Bargaining Council (PSBC) on the Wage Bill, and doubling the Presidential Employment Programme to R74 billion over the Medium Term Expenditure Framework (MTEF). There is anticipation for National Treasury to release the pension early.

It is disappointing that there is no stimulus plan, as it makes it uncertain how the economy will grow without economic stimulation. The local election results show people are exhausted of hearing the same promises from government.

The 2022 February Budget should include a stimulus plan to grow the economy, which will create employment; a further expansion of the Presidential Employment Programme; an extension of the R350 Relief Grant; the intensification of the Local Economic Recovery Plan commitments, especially on local procurement; the Pension Fund Access Bill; the modernisation of the Unemployment Insurance Fund (UIF); and sector relief to specific sectors, such as tourism and hospitality.

On the network blockages, Mr Parks said promises were made but there has been little action. He asked for real turnaround times and said investments into SARS should also be included in the 2022 February Budget.

He said there is space to increase taxes on the wealthy through income, inheritance, imports, and estate and luxury goods. Eskom needs more support and measures to assist SOE’s to stabilise in general should be fast-tracked. These measures include retabling the Road Accident Fund (RAF) and the RAF Bill, because the RAF cannot be a burden to the economy. Plans on how to stabilise local government should also be included. There should be more measures on corruption and wasteful expenditure.

A revamp of the public procurement system is necessary.

On the wage bill, Mr Parks said the Public Service Coordinating Bargaining Council (PSCBC) should be engaged, as there are measures to protect public servants from inflation. Payments to politicians and to management should be cut. There should also be a reversal of austerity cuts to critical frontline service departments such as Health; Basic Education; the Commission for Conciliation, Mediation and Arbitration (CCMA); and the Department of Trade, Industry and Competition’s Industrial Financing Programme.

National Treasury needs to have an honest conversation with the Reserve Bank because the decision to increase the repo rate, by both entities, when the economy is already crippling, was not wise.

Discussion

Mr D Ryder (DA, Gauteng) said the response from National Treasury was both considered and not arrogant this time around. Although the SAB is justified for requesting further details, he said the late distribution of the annexures in the presentation may provide more clarity.

To the PBO, he said the entity’s bias is becoming more and more obvious especially in the responses to National Treasury. The PBO’s mandate of independence was forgotten in the responses, and the attack on National Treasury was unreasonable.

To OUTA, he said National Treasury mentioned some of the challenges came about before Covid-19, and the structural reforms are necessary for the reaffirmation to zero-based budgeting, as detailed in the MTBPS on page four and page 38. He said the Zero-based Budget Programme remains on track and there should be more acceleration on this programme. The pilot project is focused on public enterprises. This is a good place to start, and a good place for a comment from National Treasury on the issue. He said the acknowledgement of the tax burden by National Treasury addressed the comments from the stakeholders, and he agreed with SAICA about needing more taxpayers instead of increased tax rates.

On the value for money response from SAICA, relating to municipal and provincial spending, he said National Treasury outlined tools being made available at these levels. Unfortunately the management tools are only being adopted by the municipalities and provinces choosing it. There is no consequence management for municipalities and provinces who choose not to use it. Not every municipality has implemented the Municipal Standard Chart of Accounts (MSCOA). This is done by those who want to misuse money.

The implementation of any management tools or assistance of such tools must be closely linked to consequence management. Compliance is forcefully enforced. National Treasury has a compelling case when trying to enforce something. Treasury must make sure the levers are pulled when necessary. The absence of comments on the challenges of the Budget is important. The comments by SAICA on the contingent liabilities is concerning. New ideas were provided by COSATU, which was unexpected. Increasing the tax rate through inheritance and wealth should be the last resort because inter-generational wealth transfers has kept some South Africans in servitude. Inter-generational wealth is something which has been fought for, so the introduction of higher inheritance taxes would be counter-productive. On the final comments made by COSATU, Mr Ryder said the South African Reserve Bank needs to remain fiercely independent and he encouraged Treasury not to interfere or intervene with the South African Reserve Bank’s (SARB’s) implementation of rate hikes or reductions. 

Mr Y Carrim (ANC, KwaZulu-Natal) said PBO and National Treasury are encouraged to meet within a month. PBO is an institution of Parliament so National Treasury has no choice but to respect this, regardless if there is a disagreement or not. He agreed with PBO about the definitions, and said if National Treasury is condescending on definitions, then PBO does not have to apologise because PBO answers to the Speaker of Parliament and the Chairperson of the Committee. He said independence does not mean not having a view. This is what a debate is. PBO has the responsibility to encourage a wider range of approaches.

On the issues raised by Amandla.Mobi, he said the topics were already addressed. He agreed with Amandla.Mobi, saying it was not essentially the people’s fault if the people found themselves in unfavourable conditions.

There is a disagreement regarding National Treasury having an anti-poor budget. Rather, the Budget is not transformative enough to withstand constraints. Inequality is also highly racialised, which makes the issue more explosive. It is a good idea for members of the public to be able to make comments about the Budget. The process needs to be activated once again.

He said National Treasury meeting with pensioners is not a problem because there is agreement on the R350 grant, but not the amount of about R2000 which is demanded by Amandla.Mobi, which is not currently feasible.

On the Health Promotion Levy, there has to be a balance between the needs and interests of various stakeholders, including the working class, the emerging African farmers, and farmers as a whole. He disagreed with the statement, if expenditure is expanded corruption is encouraged. This would mean people are inherently corrupt, so nothing can be achieved.

Responses

National Treasury

Mr Sishi said there will be a follow-up on the meeting with the PBO. Various engagements were held with some of the stakeholders present at the current meeting, where comments were made and received in a panel discussion. The presentations/submissions made were closely evaluated and key points to issues were used to respond to the comments. The statements made by the PBO included statements such as the government is unlikely to achieve its performance targets; the fiscal framework working is not credible; and the capacity to implement economic reforms in government is poor and unlikely to succeed. It is difficult to see how the diagnosis from the PBO justified adding more debt and spending. The PBO said there are consequences which flow from allowing socio-economic challenges related to unemployment and poverty to continue. It could have serious implications for the future. National Treasury is working on creating a balance between two significant challenges and there are disagreements on how to achieve this. Government spending is not bad at all. There were situations where increases were necessary and were made. There is a difference between how South Africa entered the current global crisis, versus the previous global crisis where the fiscus was in a strong position. South Africa is not like developed countries. There are limited tools to respond to global risks and threats, so the worst thing which can be allowed to happen is for the fiscal position to be deprived of its ability to respond to situations. Judging people’s ideological views was avoided. Instead National Treasury focused on data which clearly showed government spending increased, and deficits increased between 2009 and 2019. There is a comparison of South Africa’s fiscal deficits to those of other emerging market and developing countries, set out in Chapter Three of the MTBPS and in the February Budget Review in previous presentations made to Parliament. It shows South Africa’s fiscal expansion on average was one of the largest in the emerging world over the last ten years, consistently. It was also clear the economy did not grow in these ten years. Instead, there was more debt and interest on the debt.

In 2022, National Treasury will spend more than R300 billion on debt service costs. There are concerns about this matter being ignored. There are concerns about government being encouraged to spend more, which will accumulate debt. The parties making comments should provide clear reasons, as there is a responsibility to ask questions. The impact of a fiscal crisis will be devastating for the economy, especially for the poor. The PBO’s suggestion for a global consensus on the fiscal crisis is not ideal, as the idea of a global consensus is overplayed when global policy action is considered. Central banks globally, are making reversals on monetary policies in response to macro-economic issues. He said he was confused about the PBO being against National Treasury and comparing the tax burden of South Africa to other countries, as this is a straightforward method when it comes to tax policy measures. It is useful because global competitiveness is an important issue where investors can go to different jurisdictions. Small market economies have to be aware of this because South Africa’s market of 60 million is not enough to dictate where investors should go. National Treasury is sympathetic, and is working on what can be done on the social protection side, especially on the comments made by Amandla.Mobi.

He said some of the comments made are unfortunate and some are false, because National Treasury has never disagreed with the Davis committee on investigating options for a wealth tax or about National Treasury not increasing taxes on the higher income earners. He referred the Committee and stakeholders to the 2016 and 2017 budgets, where taxes were raised and said it is not about the rate, but the physical amount of revenue received. The focus is on increasing revenue. He said it is also false to say National Treasury tried to oppose the proposals on grants, and even tried to table a separate grant. There are conversations where different views are expressed, but this is not the final tabling of a proposal. Tax announcements are not made in the MTBPS, but during the Budget. 

On the PBO disagreeing with National Treasury’s approach to broadening tax bases, Mr Chris Axelson, Chief Director: Economic Tax Analysis, National Treasury, said tax bases can be broadened by reducing tax expenditures which the wealthy and high income individuals use. The same approach can be used for corporate companies. On the compelling reasons not to increase tax rates, he said the statement was made in the 2021 Budget, but priorities and revenue changes, so other options will be considered.

On the inheritance, estate and luxury import taxes, he said inheritance taxes and estate duties are similar, so countries choose one of the two. The two are interchangeable.

These taxes were increased a few years back to 20-25 percent for estate duty on estates above R30 million, and taxes on luxury imports increased from seven percent to nine percent, but any further changes will be considered.

On the comments by the SAB, he said page 70 of the MTBPS provides a medium term forecast on what is expected from specific excise duties, including tobacco and all alcohol variations. National Treasury looks at the relationships between tax and the actual underlying economic variables which exist, so in this case it seemed like a better indicator of medium-term revenues to use consumption over CPI.

On the transparency on excise duties and alcohol, National Treasury cannot provide certainty on the excise duty rate changes because tax announcement will be made during the February Budget, so the Minister can make changes to the policy each year. Treasury tries to have a policy guideline which gives a general view of where excise duties are going. The discussion papers on this review will be published on the initial position of Treasury. Consultations will be held with the industry on the excise duty rates and the multiplier impacts of investment. Consultations on the negative social and health impacts of excessive alcohol will be held with the Department of Health. Excise duties increase the price of alcohol, which will reduce consumption. This is the aim of National Treasury.

Chairperson Abraham said there was an agreement for more time for engagements on the budget and the MTBPS, which was required because the duty of the portfolio committees was to conduct oversight over government, and to enhance rich nation building. The engagement must seek to assist oversight so Members have a greater understanding of the perspectives which inform the decisions of National Treasury. Since this has not happened, there is no common understanding to enrich the work of National Treasury. Chairperson Abraham thanked the stakeholders for participating in the hearings and highlighted the importance of the inclusion of ordinary people in the work of National Treasury. National Treasury must be commended for ensuring public participation of ordinary people, by allowing people to comment.

The meeting was adjourned.