Medium Term Budget Policy Statement: National Treasury briefing

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Finance Standing Committee

26 October 2004
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FINANCE PORTFOLIO AND SELECT COMMITTEES AND JOINT BUDGET COMMITTEE


27 October 2004
MEDIUM TERM BUDGET POLICY STATEMENT: NATIONAL TREASURY BRIEFING

Chairpersons: Dr R Davies (ANC), Mr T Ralane (Free State, ANC) Mr N Nene (ANC)

Relevant Documents

PowerPoint presentation on 2004 Budget Policy Statement
Medium Term Budget Policy Statement [
see treasury website]
Address by Minister of Finance to National Assembly
Draft Programme
Adjustments Appropriation Bill [B21-04]
Draft Revenue Laws Amendment Bill [B – 2004]

SUMMARY
National Treasury briefed the Committees on the Medium Term Budget Policy Statement (MTBPS) as presented to the National Assembly. The issue of abuse of social services grants and the proposed tightening up of administrative requirements was discussed. There was further discussion on increased revenue and the features of the fiscal framework. The levying of taxation at municipal and provincial level was also addressed.

MINUTES

Minister’s introduction
Minister Manuel said that the budget policy statement waDrs tabled at time in which the world economic outlook suggested a difficult period. One of the key features of the period was the persistently high oil price, which raised the question of its impact on global growth. This was not just a blip, but OPEC members were at the margin of what they were able to produce. Supplier constraints related to shipping and refining capacities, and would be a feature of the global economy for a long time.

It was important to realise that ten years of persistent policy direction was bearing fruit. The growth rate was still insufficient, and the Treasury was looking to 3.9% GDP growth in the next year. Other features of the MTBPS included low inflation, with the target being maintained at 3 – 6% on a continuous basis. This had worked through positively to a lower interest rate. The other feature was the fact that the labour force survey sent a very positive signal, with 400 000 new jobs recorded. The question was not whether the growth rate could be held at 4%, but whether it could be raised. There was also a focus on infrastructure, particularly as revealed by Minister Erwin.

One of the innovations of the MTBPS was that, whereas previously social security was funded out of provincial equitable share, it was now treated as a conditional grant. Provinces would deliver it on an agency basis, but the risk would pass to national government. The disability and foster care grants were growing by leaps and bounds, so provinces were incapable of dealing with their other functions. 24% had now been taken out of the provinces to fund the grants going forward, leaving approximately R2 billion in the provinces, with KwaZulu-Natal having the biggest share. This function shift would be important in the division of revenue going forward.

National Treasury briefing
Mr L Kganyago (Director-General: National Treasury) said that a decade of structural economic change had broadened the policy room for social development. Economic performance in 2004 had shown broad-based growth well above 3% across all sectors in the first half of 2004, with buoyant consumer demand and investment in productive capacity. The rapid and sustainable adjustment to currency developments had had a particular impact on the mining sector. Inflation had been comfortably within the inflation target range and there were indications of a turnaround in employment prospects, as shown by the most recent labour force survey. In addition, steady financial flows had contributed to the Balance of Payments sustainability.

The basis of the fiscal framework was that sustainable budgeting promoted broad-based socio-economic development. Features of the framework included revenue to GDP rising by about 0,6% over the medium term, real growth in spending of 4,3% and R50 billion additional resources available for allocation. The revised forecast for 2004/05 in terms of taxation and revenue issues included tax revenue up by R1,2 billion, mainly due to strong growth in remuneration and robust consumer spending translating into above budgeted estimates for personal income tax, VAT collections and transfer duty collections on the back of the booming property market. The first and second Revenue Law Amendment Bills had successfully completed the process of translating 2004 tax proposals into law. Tax policy priorities for the 2005 budget included the simplification of the tax compliance burden on SMMEs, a review of the tax treatment of medical provision, revisions to the Royalty Bill and submission of the revised bill to Parliament, a reassessment of the current mining tax structure, particularly the gold taxation formula, the preparation of legislative tax amendments for hosting the FIFA World Cup in 2010, the release of a fiscal policy paper on environmental taxes and consideration and review of provincial own tax instruments and options for replacing the RSC levy. A discussion document on the alignment of tax reforms relating to retirement funding with regulatory reforms in the pension fund industry would be released this year.

Key MTEF priorities for 2005/6 and 2006/7 included stabilising social security grants, accelerating the land restitution programme and improving salaries for police and educators. The bulk of spending would occur in the outer years, and included supporting the new direction in housing delivery, additional resources for road infrastructure, improving the quality of the schooling system and realignment of FET, additional funding for the National Student Financial Aid Scheme, continuing the hospital revitalisation programme, investing in water resources infrastructure and continued support for the African agenda including the Pan African Parliament. Key spending areas were social services, justice and protection services, economic services and infrastructure and administrative services.

In terms of provincial finances, there had been a function shift of social security grants with a conditional grant in the interim and the equitable share formula had been adjusted for function shift and new data. Local government faced significant developmental challenges and municipal transfers had grown the fastest of the three spheres of government. In conclusion, ten years of structural change had given room to manoeuvre, higher investment growth supported accelerated growth, lower inflation laid the basis for a more certain environment for investment although the balance between capital and recurrent expenditure needed improvement, and sustainable budgeting had promoted broad based development.

Discussion
Mr K Moloto (ANC) welcomed the moves to relax exchange control and the move to establish South Africa as the financial centre for the continent. He referred to moves made by Botswana to cut tax rates and said he was not sure that this low tax rate was sustainable. He expressed concern that there might be a "race to the bottom".

Minister Manuel replied that Botswana was trying to attract companies in the financial services industry with a lower rate. In terms of tax, South Africa was not off the mark. An analysis of a race to the bottom should be evaluated within the SADC treaty and the protocol on tax. These required harmonisation and mutual support and Botswana appeared to be in contravention of this. The issue was fundamental and of deep concern.

Ms R Taljaard (DA) said that the projection of 4% was encouraging, particularly as a base for further growth. She expressed concern over whether the correct balance had been struck between capital and consumption expenditure. She asked whether it was an optimal balance and whether projects fell in the range.

Minister Manuel replied that it was important to understand this in the context of legislation. The PFMA had shifted responsibility to departments, and the tight control by the Exchequer had been released. Yesterday, the Treasury had made public its interaction with Social Services to clean up administration. Until this had been done, there was still a statutory obligation to fulfil grants. The Treasury wanted to reduce the deficit and was very conscious of enlarging capital share of the deficit going forward.

Ms Taljaard referred to Minister Erwin’s announcement and expressed concern over the extent to which the capital market could absorb the extent of borrowing required, as Minister Erwin had said the expenditure would be funded mostly from the budget.

Minister Manuel replied that this was a tough call. State owned entities had their own balance sheets, and some were stronger than others. The issue was important because the other indicator was debt service fees.

Ms Taljaard said that she had noted that the proceeds from the sale of state assets were being channelled towards capital expenditure and asked whether this was a change of policy, and if so, what the reasons were.

Minister Manuel said there was no change in policy and that the Treasury had said consistently since 1994 that proceeds were to be used in two ways, to retire government debt or on infrastructure. Over the last years, debt retirement had tended to get most prominence but infrastructure had been catered for in policy announcements.

Dr Davies referred to the figures regarding unemployment and asked what effect was anticipated, in terms of the model, if the growth rate was sustained at 4%. He agreed that there was fundamentally structured unemployment as had been suggested by the State President, he asked what effect the projected infrastructure expenditure was likely to have on unemployment, and whether the government was on track to halve unemployment by 2014.

Mr Kganyago replied that there were two sets of issues in this regard. Capital expenditure was used as a way of re-skilling, and was linked to semiskilled workers. It was hoped that people would leave the programme able to seek employment or to start their own small businesses. People without skills were targeted. The impact of other areas of capital expenditure programmes was not necessarily related to public works, but had an indirect feed through as they raised the political growth rate of the economy, with expenditure then creating jobs. The other area was in dealing with people whose skills were no longer relevant because of the changing nature of the job market.

Mr T Vezi (IFP) said that the oil price monster always seemed to come up. He asked whether the Minister believed that, when stability was restored on the continent, that stability and an exploration of resources would have an impact on the oil price.

Minister Manuel said that it came down to supply and demand patterns. Nigeria had oil but was unable to refine it. Rights to prospecting were in the private sector. Royalties were paid to the government and there was now more transparency on the application of those royalty earnings. It was important to understand the limited refining capacity, and that there was no capability to meet demand for the by-products. The recent general strike had been occasioned by the Nigerian government’s attempt to regularise the oil price. Where natural resources occurred, countries tried to sell them at the highest price.

Mr Vezi said there had been an outcry about loan sharks and asked the Minister’s opinion on reviewing the Usury Act, so that any money lender who exceeded the ceiling could be criminally charged.

Minister Manuel replied that two pieces of legislation would be published for comment within the next few weeks, the Dedicated Banks Bill and the Co-Operative Banks Bill. Institutions would be licensed for savings or for savings and loans. Co-operative banks were closed circles, and dedicated institutions would operate in a variety of different markets. There was also Mzansi. Access to financial services could be dealt with without throwing people to the sharks. Loan sharks would have to play alongside institutions that were properly recognised and regulated. Brazil, for example, had institutions with terminals in shops and the key was that these became the vehicle through which social security transfers were managed. In addition, there was a policy that every Brazilian should be entitled to borrow money. If this loan was drawn on, a fee would be due. South African banks had originally said that the concept of Mzansi was too costly, but the divide had now been crossed.

Dr P Rabie (DA) suggested that a body was needed to control taxes and asked for comment. Minister Manuel replied that governments had the right to levy taxes.

Dr Rabie referred to the proposal to reconsider the RSC levies and asked what this would entail and whether they would be replaced.

Minister Manuel said that this presented difficulties. The Regional Services Councils no longer existed, but the levy would not be removed until a replacement was in place. The levy generated about R5 billion for local government. The design was a pale tax on businesses, and this was now channelled to local government.

Mr B Mnguni (ANC) expressed concern that if there was continued tax cutting and the tax base appeared to be limited, South Africa might be running the risk of increasing taxes in five or ten years, more than they were currently reducing them.

Minister Manuel replied that the Treasury was unlikely to make cuts a centrepiece of the next budget but there was a need to consolidate. The Treasury was mindful of trends elsewhere and of the effects of the system.

Mr Mnguni said that, in developing countries, studies had shown that if, in inflation targeting, exchange control was abolished, there was a risk of capital flight. He asked whether there was a strategy to avoid the devaluation of the currency.

Minister Manuel replied that New Zealand had recently issued a paper suggesting the Reserve Bank look at exchange rates, which was interesting because New Zealand had introduced inflation targeting. There were no easy answers. The jury was also still out on capital flight. People had availed themselves of the amnesty, but there was no information on their reasons. There could be no guarantees of how people behaved.

Ms J Fubbs (ANC) referred to the demographics and said that she had a picture of the population going a similar way to Japan and Germany for different reasons, as a slightly inverted pyramid. She asked for clarity on the way in which labour had expanded and questioned whether this was because the way in which labour figures had been collected in the previous census had skewed the results.

Minister Manuel replied that it had been seen that when free compulsory education was introduced, there was a huge upsurge in student numbers. Schools in some poorer provinces now had very few learners owing to both the drop in the surge and urban migration. The demographic profile of the country was changing. Stats SA was also doing a retrospective survey on causes of death.

Ms Fubbs asked whether there had been increased collections of VAT owing to efficiency, as it still seemed a very high increase.

Minister Manuel replied that there had also been a fair amount of spending as interest rates had dropped. There would be more spending on imported products, so import taxes would be involved as well. The increased VAT numbers were not unexpected.

Ms Fubbs referred to land allocations and asked how these were reflected in the budget itself and asked whether there would be a substantial allocation in the next calendar year.

Minister Manuel replied that no allocations had yet been made. In the first two years, the take-up in social security transfers and the wage settlement would take the bulk of the funds. The key was to separate out restitution into two parts, the legal or quasi-legal and re-settlement and payment. The Treasury was working through the detail.

Ms Fubbs referred to the mining sector and said she knew that platinum was soaring and the bottom had dropped out of gold. Would this remain the case and if there were changes, would the policy be reviewed.

Minister Manuel said the gold pricing formula had been around since 1914 and the time had come to look at it.

Mr Kganyago said that the big issue was looking at the gold formula at a time when the gold mining industry was under pressure. Platinum was highly capital intensive. The contribution of gold to the overall economic growth had declined but the gold mines were still a very important employer. A balance had to be struck.

Ms Fubbs said that she acknowledged the integrity of the social grants, but asked how the challenge of sustainability would be addressed. The budget was a moderate fiscal expansionary one and she accepted that fixed capital formation was growing. She asked for clarity.

Minister Manuel replied that there was an obligation to ensure that the entitled people benefited from the system. This could never be equivocated on, but similarly those who were ineligible should be kept out of the system. Both must be committed to and administrative loopholes had to be closed. There were probably only three grants that were misused in large numbers. The growth in the old age pension accorded with demographic trend lines and there was not too much cause for concern in respect of the childcare grant, apart from the legal requirement of the means test that was not followed administratively. In terms of disability grants, there appeared to have been severe exploitation, although this was not uniform across all provinces. Some provinces employed doctors to sit in to interview to ensure that the gate was closed. The abuse destroyed the fabric of the system. The Cabinet was currently discussing the definition of disability. The growth in the foster care grant was of concern as well, and it appeared that some parents were registering their own children as foster children.

Ms R Joemat (ANC) was concerned that the new definition of disability should not increase hardships. There were cases where people were simply not employable.

Minister Manuel replied that part of the problem was that, where there was a violation of the law, the Treasury could not show sympathy. The laws were intended to limit administrative discretion; otherwise there was a risk of favours instead of policy.

Ms Joemat referred to the pattern on the road accident fund. A significant decline was tabled for 06/07 and 07/08. She was aware of anticipated amendments to the Road Accident Fund and asked whether that would substantiate the decrease or whether the Treasury was looking at increasing the fuel levy.

Minister Manuel replied that he attached more weight to the report and that it had been improved through efficiency.

Mr K Durr (ACDP) referred to tax incentives and expressed concern about the erosion of the tax base by budget expenditure. He asked how the problem would be addressed. He expressed concern about the appetite to do work in urban areas. He was concerned at the precedent of using the budget for development and was worried about the ability to prioritise. He suggested incentives were being given at the wrong time, as the property market was hot. Was money not being given for projects that would have happened anyway? He was concerned that converting commercial property into expensive residential property was not democratic, and asked which areas had been declared.

Minister Manuel replied that sometimes it was necessary to do things that did not sit comfortably. The Treasury wanted to see if it could facilitate the upgrading of decaying urban areas. It was not a useful approach to keep moving away from decaying areas. The two areas were Cape Town and Johannesburg.

Mr M Stephen (UDM) said he felt tax cutting was overrated and suggested the Treasury should shy away from it. He referred to the UIF and said it appeared the fund had a substantial excess and reserve and suggested re-looking at its role and function and extending its scope.

Minister Manuel replied that the surplus was largely a result of amendments to the Act, excluding people who resigned.

Mr Stephen said that the old age pensions were not really up to the standard he would like to see. It would be advisable to look at the structure, as increasing pensions by inflation or slightly more was not really doing much for an inadequate system. He also suggested that the Treasury should look at it support for old aged homes. These homes were being forced to take in patients who did not really belong there, in order to stay afloat.

Minister Manuel replied that eight million South Africans benefited from grants, just over two million of whom were old age pensioners. The numbers had an impact on the degree of flexibility. Increases in pensions had squeezed out welfare services completely. In the poorer provinces, old age homes had been closed down as state grants took preference.

Ms B Hogan (ANC) referred to the financial services sector, particularly micro-lending and services to the very poor. She welcomed the dedicated banks and co-operative banks but was unsure of the envisaged scenario or the relationship of micro-lenders to the dedicated banks. Was it the intention for Mzansi to take on some of these functions? There would be more protection for the poor as they moved to formal banking. The micro-lending industry was not subject to the authority of the central bank so the extension of the money supply was inhibited. The figures on the indebtedness of South Africans did not include indebtedness to micro-lenders. She asked what the competitive advantage of the smaller banks would be, since micro-lenders were not as interest rate competitive. Her broader concern was that she still did not see a coherent structure in the financial services sector, and this was particularly important in respect of micro-credit.

Minister Manuel replied that the legislation would be released, and it would be useful to hear from the Department of Trade and Industry on the question. The issue should not be rushed at present.

Mr E Sogoni (ANC, Gauteng) referred to the provinces raising their own revenue and said this was rated very low. What were the changes of their increasing their own revenue and what would be acceptable taxation as a percentage of GDP? Was there room for the provinces to add their own taxes in order to increase their own revenue?

Minister Manuel replied that taxes were funded out of one pocket, whether through personal income tax or provincial own revenue. The 25% tax: GDP ratio was all right, and tax could not just added to one side.

Mr Sogoni said that some provinces were burdened by overspending and asked whether equitable share would take that into account. Did the Treasury intend to intervene?

Minister Manuel replied that he was uncertain of what interventions were required, but the Treasury had intervened in the past as needed.

Dr S Cwele (ANC) welcomed the increases for police and educators and asked whether there had been an evaluation in the health sector after their increases.

Minister Manuel replied that the health sector changes had originally been provisions for scarce skills and this had been intended as a sweetener to retain and attract professionals. By the time the money was divided, the desired benefit was not quite achieved. There were still issues of detail to be worked out in respect of police and educators. It was hoped that there could be recognition that a teacher able to teach maths and science was an asset. Labour issues were often problematic, however, and this had to be negotiated.

Dr Cwele said that the wage negotiations had been a very positive development and asked whether there was an intention to encourage that in the private sector.

Minister Manuel replied that it had been a battle to get the bargaining council to accept an increase based on a forward-looking inflation rate.

Dr Cwele referred to administered prices and measures and said that some prices were managed by local government. Some of these far exceeded inflation because municipal managers said they needed the revenue. He asked for comment.

Minister Manuel replied that this was an ongoing battled. Municipal resources were stretched and he used the example of Tshwane. The old Pretoria municipality covered a very tight area, but Tshwane now included the Winterveld which was geographically very different, and very poor. The municipality was compelled to render services but was unable to recover revenue. The Treasury was very alive to the problems.

Dr Cwele said that the price of education was very high, particularly the price of tuition and asked if there was any strategy to moderate this.

Mr Nene referred to the improvement in salaries and asked why the two departments had been selected. He felt that the strategy should be to improve overall performance.

Minister Manuel replied that, if it was opened to general bargaining, everyone would say that they had a scarce skill.

Mr L Zita (ANC) said he had read in the Sunday Times that approximately R160 billion was envisaged for infrastructure development. This could also be seen as a massive subsidy and he asked what the quid pro quo would be from capital.

Mr Zita referred to the DPSA and asked in what direction the rethinking was going.

Minister Manuel replied that the mandate was restricted. The DPSA Act as amended had primarily an infrastructure role, and its client base was largely municipalities.

Mr Zita asked what the approach was to the problem of inequality. Productivity had improved in the past five years but there was no real evidence that this was being shared. He asked what was being done.

Minister Manuel preferred to leave the jury out on the issue.

Mr Z Kolweni (ANC, North-West) asked for more clarity on deficit and real growth in spending, as well as the R50 billion available for allocation. He asked what water infrastructure was to receive investment as the Department of Water Affairs and Forestry had announced its intention of transferring infrastructure to municipalities.

Ms Taljaard asked whether the Minister was satisfied that the measures envisaged were sufficient to deal with the problem in respect of social grants. Was there a concrete picture of what social development should be in place?

Minister Manuel replied that the Treasury could only continue to work on it. The key was ensuring that legislation was so cast that it limited discretion at the front desk. There had to be a clear test to ensure that people complied with the law. The jury would remain out on whether the grant system was optimal.

Ms Taljaard referred to infrastructure development and said that a lot would be import-based in content, which put pressure on the current account. She asked for the projections / concerns /models?

Minister Manuel replied that it was still early days and suggested that Ms Taljaard not sell South Africa short on capacity! Modelling ad allowed for a significant important content.

Ms Taljaard asked for clarity in respect of the public service wage agreement. The government proposed to fund part of it by reducing its contribution to the pension fund, and she was concerned that this was not quite moral.

Minister Manuel replied that the pension fund was a fully funded system. The contribution was substantially higher than in the private sector. The issue had been well addressed.

Ms Taljaard asked for clarity on exchange control, and the exclusion of individuals.

Minister Manuel replied that this was not an issue and he only knew of two individuals looking for relief.

Dr Rabie said he did not negate the government’s right to impose taxes but was concerned at the limited tax base. He was concerned at the burden placed on taxpayers particularly with reference to smaller and medium businesses. A body was needed to c-ordinate the three tiers of government in respect of tax.

Minister Manuel felt that the body concerned was the National Treasury.

The meeting was adjourned.

 

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