Medium Term Budget Policy Statement: National Treasury briefing

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Finance Standing Committee

25 October 2005
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FINANCE AND JOINT BUDGET COMMITTEE
26 October 2005
MEDIUM-TERM BUDGET POLICY STATEMENT: TREASURY BRIEFING

Chairperson:
Mr N Nene (NA, ANC) and Mr T Ralane (NCOP, ANC, Free State)

Documents handed out:
National Treasury briefing
part 1
National Treasury briefing
part 1

SUMMARY
The National Treasury reported that the key themes of the 2005 Medium-term Budget Policy Statement (MTBPS) were accelerating growth and investment, as well as working on standing budget priorities. The growth forecast was strongly positive, with a few significant upside and downside risks. Fiscal expansion continued by growing by R78 billion or 6.3%, due to a strong economic performance and there were significant increases in resources for each sphere of government. Treasury suggested the targeting of new funding in line with the Accelerated and Shared Growth Initiative (ASGI), new needs, and the standing budget priorities for government service delivery, such as housing and education.

Members asked whether a skills audit had been done and the relevance of those skills. Why was there continuing compensation for under-performing departments? They asked in what way the Treasury could intervene in municipalities to prevent ‘fiscal dumping.’

MINUTES

Finance Minister’s briefing
Mr T Manuel, the Minister of Finance, said that no country could grow only on the basis of macro-economic balance, yet no country was able to grow without it. The MTBPS had to be analysed with this in mind. There were important ‘binding constraints’ to economic growth. The Treasury wanted citizens to be in broad agreement with their initiatives and ‘take ownership’ of the economy. Infrastructure was another important aspect of the MTBPS, but there was a dire shortage of engineering and artisans skills in the public service. For example, Transnet had fewer engineers now than were used to build the trainline from Ermelo to Richard’s Bay. Such issues constrained growth.

The link between these factors and the ‘second economy’ had to be addressed. Another issue of importance was why the growth rate for the whole economy in 2006 would only be 4.2%. The Governor of the Reserve Bank had highlighted some insecurities in the global market, such as the high oil price, that would affect South Africa. He would have to react to these forces with the Monetary Policy Committee. However, the economy was in a strong position right now and there was no need to be pessimistic.

National Treasury briefing
Mr L Kganyago, Treasury Director-General, said that the key themes of the 2005 MTBPS were accelerating growth and investment, as well as working on standing budget priorities. The macro-economic overview saw brisk economic growth of 4.4% in 2005, which would rise to between 4.5% and 5% in outer years. There would be a slowdown next year to 4.2% due to the oil price, higher interest rates in the United States and slower growth in Europe. Consumer spending was buoyant and public and private investment was robust.

He said that the growth forecast was strongly positive with a few significant up- and downside risks. Private and public investment would rise by an average of 9.7% per year. The fiscal envelope would increase by R78.3 billion and there would be a possible decline in commodity and oil prices. Additional allocations to national departments and conditional grants over the MTEF period included R20 billion for investment in the built environment; R12 billion for education, health, libraries, social grants, cultural institutions and sports participation; R8 billion for investment in improved public administration and R9 billion for economic services including science and technology development and industrial policy initiatives.

In the Provincial budget framework, R46 billion would be added to Provincial budgets; R30.8 billion for the Provincial equitable share; R15.1 billion for conditional grants and R15 billion would be spent on the Provincial infrastructure grant. In the local budget framework, the local governments would receive an additional R2 billion over the 2006 Medium-term Expenditure Framework (MTEF) to improve community infrastructure and the quality of services, and expand the provision of free basic services.
In conclusion, fiscal expansion had continued by R78 billion or 6.3% due to a strong economic performance. There were significant increases in resources for each sphere of government. Treasury suggested targeting new funding in line with the Accelerated and Shared Growth Initiative (ASGI), new needs and the standing budget priorities for government service delivery, such as housing and education.

Discussion
Mr T Ralane (ANC, Free State) asked whether a skills audit had been done and the relevance of those skills. Why was there ongoing compensation for under-performing departments? How was the Regional Services Council (RSC) compensation going to be allocated to municipalities?

Minister Manuel said that there was a constraint on capacity, and under-spending had to be queried by Parliament. Treasury could not train people randomly to be engineers, but they could take evaluations periodically and make recommendations. To withhold money, there had to be persistent and material breaches of authority. The under-spending resulted from poor planning in general, and not from poor financial management. There was a lag sometimes because the money was available before the plans finalised. The RSC levy compensation issue was unresolved as the replacement system had not yet been decided.

Mr K Moloto (ANC) said that there was a trend where the inflation of goods and the inflation of services were diverging significantly because of administered prices. Was Treasury dealing with this?

Mr J Moleketi, Deputy Minister of Finance, replied that there would be variations in the inflation in any given ‘basket of goods and services’. Both the Minister and the Reserve Bank Governor had raised some concerns about administered prices. Government had to analyse its own activities with regard to administered prices to keep inflation down. Mr Kganyago added that the international dollar price of oil affected the local petrol price. This, along with higher municipal rates and taxes, pushed administered prices upwards.

Mr I Davidson (DA) said that it was essential that the economy achieved a 6% growth rate. How this was going to happen and when this would be achieved? The private sector was the main engine for this growth, and it needed to be spelled out how involved the sector would be in the infrastructure roll-out. Fixed direct investment (FDI) into the country remained low and this worried him, notwithstanding the Barclays/ABSA deal. South Africa was not receiving the same amount of direct investment as other emerging markets. He was disappointed that the Minister did not deal with the issue of corporate taxation, which could go some way in improving direct investment. He endorsed the Minister’s view that there was a skills crisis.

Minister Manuel replied that it was evident that to achieve FDI, there were certain factors such as certainty that had to be present. However, the key determinant was market size. The second issue was that the money had "very little conscience". Thus it was important to get peace and financial services working in Africa to make it more attractive. A market of 800 million Africans was comparable to a billion Chinese. The South African market was too small to compete on its own. It did not follow automatically that a drop in taxes led to the private sector investing in the economy. The costs of management in South Africa were four times higher than in Brazil for example. The Secondary Tax on Companies had acted as a valve to keep money in companies to expand and create employment.

Mr B Mnguni (ANC) asked whether it would be better to use the surplus to invest in skills training and bursaries for example, instead of putting tax monies ‘back out there’ for consumption?

Mr M Johnson (ANC) said that the most important issue for him was the Human Resources Development Strategy. What was the government doing in this regard?

Minister Manuel said the question was where to fix the problem of skills development. The Ministers of Labour and Education were better suited to answer this. Even if money were thrown at the issue, it would not necessarily fix the problem. It was more of a systemic problem.

Mr T Vezi (IFP) asked in what way the Treasury could intervene in municipalities to prevent ‘fiscal dumping.’ Minister Manuel replied that dumping usually occurred during February and March or just before elections. The issue was about the quality of management. There had to be periodic evaluations of how things were going.

Mr Y Bhamjee (ANC) asked what criteria were used to determine a shortage of skills? Should the artisans be certified, or should they just have the necessary skills? Minister Manuel said that the Minister of Labour would better answer that question.

Mr S Asiya (ANC) asked if Treasury was sure that when departments presented their budgets, they were accurate, especially given the occurrence of ‘fiscal dumping.’

Mr Moleketi said that Departments formulated programmes usually based on the State of the Nation Address by the President. They would come up with a plan and present it to the Treasury for funding. Treasury had no way of finding out how the money had been spent as skills development. The responsibility for finding this out lay with the departments and Parliament. Treasury also had to trust the departments that they were going to use the money for the right purposes.

The meeting was adjourned.

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