Medium Term Budget Policy Statement: briefing by Minister & Director General

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Finance Standing Committee

25 October 2006
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FINANCE PORTFOLIO COMMITTEE
26 October 2006
MEDIUM TERM BUDGET POLICY STATEMENT: BRIEFING BY MINISTER & DIRECTOR GENERAL

Chairperson:
Mr N Nene (ANC)

Documents handed out

Medium Term Budget Policy Statement 2006 (available at www.treasury.gov.za)
Speech by the Minister of Finance
Presentation on Medium Term Budget Policy Statement 2006

SUMMARY
The Minister of Finance and the Director General of the National Treasury presented the Medium Term Budget Policy Statement. The presentation covered the state of the economy, predictions for the future, key factors for the budget for the following financial year and strategies for reviewing departmental expenditure and for correcting deviations in the balance of payments. Questions were concentrated around capacity problems, savings and investment rates, sustainable growth rates and rising interest rates.

MINUTES
The Chair welcomed the Minister of Finance, Mr Trevor Manuel, and the Director General in the National Treasury, Mr L Kganyago.

The Director General presented an overview of the South African economy. Expenditure trends showing that real non-interest expenditure had almost doubled since the 1997/98 financial year. Commodity prices and growth rates remained good and thus growth in revenue was strong. He did however predict under spending of R4.2 billion in the current financial year yielding a trade deficit of 0.4% of GDP. This was based on consumer spending being consistently higher than production (especially with regards to oil). Treasury predicted sustained growth in the future (even figures higher than the targets set for the country at about 9% in 2009).

Mr Kganyago went on to outline Treasury's macroeconomic framework for the current year and its predictions for the years up to 2009 including real GDP growth and GDP at current prices. Figures to note would be the decline in predicted expenditures and imports as well as increases in forecasts for exports.

He outlined the global environment as one that was characterised by high risks (such as persistent deficits in the US), higher interest rates across the board and moderate growth rates (noting that this was driven by Chinese growth which made up 65% of the figure). He cautioned that the commodity boom that underpinned current growth trends in RSA was not likely to last as international investment in the country would be likely to decline in the wake of growing economic pressure overseas.

He went over the issues surrounding domestic credit and the boom in the housing market that was subsiding. One million jobs were said to have been created in the last three years but challenges facing the economy including the alterations in commodity prices among others in the short run and long-run challenges centered on poverty reduction and trade performance. He further showed that poor agricultural and mining performances put a dampener on growth figures and that high commodity prices were a “double edged sword” as they boosted platinum and gold prices but also those of imports such as oil. In-year adjustments were shown to be rollovers of unspent budgets (for projects such as the N2 Gateway housing project), unforeseen expenditures (flood damage), self-financing, the “shifting of funds” instead of “transfer of funds” and the large savings by Correctional Services and Land Affairs which resulted in an increase of expenditure for the year.

Key spending areas focus on infrastructure, social services (at 57% of budget allocations or R21.7 billion), spending on improvements for the FIFA World Cup, basic service expenditure, the criminal justice sector as well as maintaining the devolution strategy by channeling resources towards provincial and local government.

Discussion
Mr I Davidson (DA) asked about Treasury's stance on supply-side initiatives to correct sagging production and to close the trade deficit in the economy. Could growth change from being consumption driven to being investment driven? He asked the Minister to comment on the Harvard Working Paper that indicated that countries like South Africa focused investment on the non-tradable sector which hampered growth and the likes. How sustainable could the financial account be, seeing that it was covered by international inflows that the presentation noted were sagging (he placed figures on the table such as the decrease of inflows from R58.5 billion at the beginning of the year to just R15 billion later this year).

Mr. Davidson referred to the infrastructure rollout and said that it had been mentioned that this would exasperate the deficit (especially the export component). He asked if supply side incentives and sectoral intervention would encourage exports and what the plans were for this and whether the private sector was ready to respond to these incentives. He mentioned that the savings rate was low (at about 13.75%) and asked what their strategy was to increase this rate – perhaps such policies as lowering taxation on retirement funds and corporate tax policy to increase savings.

Finally he asked about the surplus predicted for the 2007/08 financial year and if it was possible for there to be a surplus thereafter despite the existence of an inflated contingency reserve.

The Minister answered that the paper in question was premised on “self-discovery” and therefore the boosting of tradable goods and referred the Member to the original Growth, Employment and Redistribution (GEAR) document which discussed the encouragement of non-gold exports. He mentioned that, although the government encouraged this, it would take more than government alone to get the country to this point. Current lags in private sector investment decision making accounted for some of the stumbling blocks and that all parties should be focused on the expansion of industrial opportunities. He said that managing the development of a country was not as simple as theories and that nation states were also overcome by circumstance at times. He provided the example of the bull market in the 1990’s where everyone put their money in derivatives rather than capital expenditure–except for countries like China where government promoted competitiveness that took international trade by storm. He said that countries like South Africa should not feel themselves incapable of competing against major economies like that of China. With regards to the current account deficit, the Minister referred the Member to slide 13 that indicated growth in refined products.

The Minister replied to Mr. Davidson’s second lot of questions by saying that the paper did not take account of the detail of domestic savings issues and the high rents that South African enterprises sought. Low savings rates were an issue that had to be dealt with but the Department would also be happier with increased investment rates.

Referring to the latter questions, he said that the time lags in implementation of investments and projects had to be better understood and that it was early days in projects such as the building of the stadiums to host the FIFA World Cup.

Dr S van Dyk (DA) asked if due consideration had been given to inflation when estimating that R80 billion would cover government expenditure. He also asked the Minister to speak further about the capacity problems and employment equity spending and especially how the monitoring of project execution would be conducted owing to this capacity problem. He further enquired whether the economy could rely on foreign investment given global markets at the moment and if it was not better to stimulate trade in South Africa so as to increase exports in order to narrow the deficit. He also requested the Minister to dispel business uncertainty regarding the current taxing system.

He asked about the increase in revenue collections and its impact on the economy and whether this kind of over-collection was justified given a loss in production capacity in the country due to a loss in profits etc. as a result of over-taxation.

The Minister answered the question regarding the liberalness of the budget with a curt “no” - he mentioned that these figures were carefully arrived at and that every attempt had been made to get as accurate a prediction as possible. The Department was geared towards pushing capacity and that this “constraint” would not be permanent. Referring to page ten in the Medium Term Budget Policy Statement, he said that there would be adjustments to the current system of skill interdependence between Departments. With regard to the tax system, the Minister defended the Department’s policy option by labeling intricate tax incentive schemes as convoluted and saying that a clear system of taxation helped with legal certainty and private sector decision making and that lobbying and the like were consequently diminished.

Referring to the allocation of resources, he said that the Department allocated budgets but had no control over expenditure and that this issue was up to Parliament to govern and that to date Parliamentary Committees had great latent influence and did not check progress in certain issues outside of an actual presentation.

The Minister rejected the assertion that the figures the National Treasury had put forward were incorrect and said that there were many committees in the Department who made sure that the figures were correct.

Mr Kganyago explained that, with regards to the current account, this deficit could only be offshore funded. The nature of the problem was threefold: that domestic expenditure exceeded incomes and that there should be a constraint in domestic expenditure to rectify the problem – this could be done by either curbing government or household expenditures or otherwise by increasing the interest rates which was not a function of the Department but of the Reserve Bank. He continued that, to date, the burden of adjustment fell disproportionately on monetary policy but, at present, monetary and fiscal policy were aligned and working together. Poor export performance and an imbalance in the investment-savings ratio could also be underlying problems. With regard to the latter, certain fiscal stances could boost savings and that a deficit structured on this type of problem was not wholly bad.

Mr N Ngcobo (ANC) [Chairperson of the Portfolio Committee on Science and Technology) asked about the extent of the allocation afforded to address the shortage of skills and whether this strategy took a holistic approach.

Addressing skills and the shortage thereof, the Minister took the science and mathematics pass rates in the Eastern Cape (about 4% and 6% on higher grade in matric respectively) as an example. He said that critical areas to concentrate on included teachers of this subject, social workers and the likes. He said that, although the Further Education and Training (FET) colleges were making progress, there should be a refocus on artesian and mathematics skills.

Mr C Wang (ANC) asked if there was a strategy for labour-intensive tourism activities to become sustainable in the domestic market–here he referred to China’s inter-provincial tourism incentives especially with regard to their diplomats.

The Minister said that programs promoting domestic tourism were underway such as the television program “Going Nowhere Slowly”.

Ms N Mokoto (ANC) asked if the departmental savings could be channeled towards helping with the problem of unemployed graduates and whether they could not be primed to fill vacancies to capacitate government. She also questioned whether the private sector was geared towards local production with regards to issues on infrastructure development. She asked what planning surrounded the issue of oil imports and the decrease in South Africa’s fuel production capacity.

The Minister answered that, although government should concern itself with increasing employment, it should not be the employer of last resort. The Department did have an internship program that was very successful but capacity was still low. He said that he did not know whether the private sector was geared for local production but guessed that incentives for this in the business sector revolved around profits. He referred to the oil imports by saying that biofuels as alternative energy sources were encouraged and provision for incentives had long been founded (he referred to the project to extract biofuels from wheat in the Free State). Domestically about 40% of fuels were synthetic and the South African initiative to extract fuels from coal added to this. He did concede that South Africa was internal combustion reliant and that this required imports.

Ms O Kasienyane (ANC) [Chairperson of the Portfolio Committee on Labour) made the point that students with matric certificates were often unable to access government funding to attend the FET colleges and that unemployed youth were frustrated. She also asked about the strategy for the transport sector drawing attention to roads linking the Northern Cape and North West province that would be busy during the FIFA World Cup in 2010.

The Minister replied that the N14 (he stood under correction) was the one the Honourable Member referred to. The state of the roads in South Africa advanced the cycle of repair and issues arising from jurisdiction (as to provincial or National responsibility) were being dealt with.

Mr M Johnson (ANC) drew attention to the proportion of the budget concentrated on the poor and declared that the capacity issues transcended all departments.

The Minister responded to Mr Johnson’s comments by saying that he had no fixed opinion of the Small Medium and Micro Enterprises (SMME) procurement policy. He did mention that regulations were in place to ensure that government settled its invoices within 30 days of issue and if not were required to publish these deviations because small business could not cope with late payments. He asked the Member to refer to the Joint Initiative for Priority Skills Acquisition (JIPSA) and the Deputy President with regards to capacity constraints and the capacity Indaba. He said that skills in government allowed it to concentrate on the provision of free basic services and that there was a strategy to ensure the end of this problem.

Ms D Robinson (DA) said that, although people were taught to read, real problems lay in the reinforcement of these abilities and that sufficient libraries should thus be provided. Resources for this were needed and she proposed that government surpluses or savings be channeled towards this problem or for there to be a specific allocation for this.

The Minister replied that the Member should refer to page 264 for a summary of allocations to libraries such as the R200 million in 07/08 and R360 million in 08/09 year.

Mr A Harding (ID) referred to the Main Budget Framework table on page 10 and to the third paragraph on page 12 of the Medium Term Budget Policy Statement that mentioned that 46% of the budget had been spent by September. He asked what sort of “trouble” departments got into for under-spending and for more information on the projections of future spending. He also referred to transfer duty breaks for properties under R500 000 and said that these properties were generally bought by Historically Disadvantaged Individuals (HDI) and people just starting up–he said that these people who were currently paying off these properties were hard hit by interest rate increases and that the incentives got these people into trouble. He asked the Director-General how the dampening of credit demand would take place and whether tax breaks or different policies on mortgages could help this problem.

The Minister replied that housing prices had increased dramatically in countries like Hong Kong and Britain although there was a 95% depreciation in this sector in the USA over the same period. In terms of tax breaks, all consequences had to be taken into account and half the problem was keeping the solution simple (not a complex system of incentives etc) and second mortgages that the government could not be asked to “fund” out of tax payers money / public finance.

He could not make a call on the spending strategies of departments and the bulk of a budget could possible be spent over a short period of time. Expenditure patterns were all but linear and could not be equally divided over 12 months, although monthly expenditure figures were published.

Mr B Mnguni (ANC) asked about the shortage of South African oil reserves and why incentives to oil producing companies were still in place despite this shortage. Domestic fuel producers should be the beneficiaries of these incentives. .

The Minister responded by saying that biofuels already had a tax code with incentives included and asked Members to refer to chapter 4 page 49 of the Medium Term Budget Policy Statement that dealt with gas and oil company incentives for further details.

The meeting was adjourned.


 

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