Medium Term Budget Policy Statement 2007: Minister & Treasury briefing

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Finance Standing Committee

31 October 2007
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Meeting Summary

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Meeting report

31 October 2007

Co-Chairpersons: Mr N Nene (ANC) Ms L Mabe (ANC) & Mr B Mkhaliphi (ANC)

Documents handed out:
Medium Term Budget Policy Statement
Medium Term Budget Policy Statement: Speech by Hon Trevor Manuel, Minister of Finance

Contribution of food inflation to Headline Inflation (January-April 2007,Year on Year)

Audio recording of meeting

The Medium Term Budget Policy Statement was presented by the Minister of Finance and the Director General, National Treasury. The background and reasons for the medium term budget policy were outlined. Both presenters highlighted the growth in the economy of the Republic of South Africa over several previous years but warned that in the increasingly integrated global economy, there were several emerging problems, including the growing gap between the skilled and employed sector and the unskilled unemployed sectors, and the fact that the emerging economies of China, Brazil and India were leading to a re appraisal of economic strength. In addition, the volatility in the global economy was difficult to forecast and a prudent approach was required in view of the uncertainty. The cyclical aspects of the 6% targeted growth could not be ignored, and a holistic appraisal was needed. Matters of concern included inflation, higher-than-budgeted wage settlements that would lead to reduction in company profits, and the need to achieve long term sustained growth in order to achieve government targets around access to basic services. Departments would need to curb unnecessary expenditure severely. Focus must be placed on accelerating the growth of the economy and the rate of investment to achieve real distribution, and the current account deficit was giving some cause for concern. Rising food prices worldwide were due to a number of factors, and against this backdrop South Africa must concentrate on its economic objectives and set aside a surplus to cater for leaner times ahead.

Members posed questions on broad based black economic empowerment and how stringently this would be applied, tariff reduction, whether a ban on luxury imports would ease the current account deficit, the position of the workers in construction companies, the need for caution, the flow of capital, the likelihood of reaching the targets to reduce unemployment, the approach to non-performing departments,
profits made by companies, and the position on skills development. Increased allowances, the position of South African Airways, raising of the interest rates, redirection of the surplus were also raised and discussed in detail.

Medium Term Budget Policy Statement: Address by Minister of Finance
Hon Trevor Manuel, Minister of Finance, indicated that under the previous regime it had been customary to present a budget in February, and then in October to present a secondary or Mini-Budget, in order to settle the funding for the rest of the financial year. The approach now followed was far more scientific and orderly, and he stressed that, despite the media reports, this was not to be regarded as a mini-budget, but was a Medium Term Budget Policy Statement (MTBPS).

This MTBPS was produced six months into the current budget as the statistical figures were becoming sufficiently available to enable trends and tendencies to be determined from them. These trends and tendencies included developments in the global economy and the local economy. They also included examination of which State departments were spending within their Budget allocations, which in turn was an indicator of how service delivery was taking place. At this time a Quarterly Report from the Reserve Bank became available for interpretation. Thirdly, in terms of the business cycle it was possible to ask for motivations for adjustments as against the three-year cycle. All these factors would set in motion a process of evaluation for future recommendations and allocations.

Minister Manuel emphasised that the key object of the MTBPS was a report to Parliament so that Parliament could make its inputs for the forthcoming budget.

Minister Manuel
stated that there was currently a great deal of uncertainty about the global economy and its prospects. Included in these factors were the write-downs by the Wall Street banks arising from the sub-prime mortgage crisis, which seemed to him to be spreading, and the imbalance regarding the global oil prices which was a substantial and worrying factor.

He pointed out that the analysis of the 6% target growth in the economy could be confusing. South Africa had to achieve that 6% target but statistical revenues in this regard revealed it as very cyclical. The figures were good, but did not lead to tax reductions, and a cyclical budget analysis was required before a final conclusion could be reached. The trend, however, was promising. He added that to understand what was happening in the economy required a holistic appraisal, not a concentration on any one factor. Currently there was surplus of expenditure over income in the medium term, but this could not indicate any adjustment of the tax rates at the next budget in February, because there was an arbitrage gap. Matters that currently gave rise to concern were inflation, and higher-than-budgeted wage settlements that meant that there would be a reduction in company profits at declaration time.

Currently, as set out in Chapter 6 of the Report, there was strong support of local government in order to support universal access to basic services. To achieve this target a long-term substantive growth was required and it would be assisted by a simplified approach. This would include attempts to make savings at the Government level and if unnecessary or luxurious expenditure was curtailed there could be a saving of R700 million a day. Each department was being required to examine its budget at the level of accountability of front or first line expenditure. Some Departments had revealed that considerable savings could be achieved by not drawing on the provision made for luxurious expenditure. It was intended to divert this saving, which amounted to R2.8 billion annually, to service delivery.

Mr Lesetja Kganyago, Director-General, National Treasury, made the point that the country had to focus on accelerating the growth of the economy and the rate of investment in order to achieve redistribution through the fiscus. He pointed out that much had been done and that since 1995 expenditure, in real terms, had doubled and would be the basis for future growth. However, Government at the three levels could only do so much, and much was also required of the private sector, which was expected to grow by 70%. Commodity prices were increasing; the increase in gold and platinum suited South Africa well, but there was an alarming rise in the oil price, which was furthermore a cause of concern as the supply response to the increases was slow. The overall slow-down in the global economy was also a concern. Currently, South Africa was earning R2 billion a week, or R400 million a day, from commodities, but against this there was an increasing current account deficit, that gave cause for concern. While there had been a capital outflow, which was exacerbated by the increase in the oil price, South Africa’s savings level was dropping, and it was relying on capital inflow to balance the budget. The emergence of the Asian economies as powerhouses seemed positive, but more facts and figures would be needed to evaluate the long terms results. In the statistical rankings, only three countries were worse positioned than South Africa in terms of current account deficit. It was of concern, but not a cause for panic as yet. .

Mr Kganyago pointed out that the supply side pressures were also worrying, especially the cost of food. He used the local and world price of wheat and maize to illustrate his point. The world price of food such as wheat was affected by global warming, meaning that less was currently being produced. Whilst maize production was increasing in certain states in the USA, the increased production was being diverted to bio-fuel production, which again impacted upon the price to be paid by the domestic user. In USA, the sub-prime mortgage rate was a problem. Steps to curb inflation in China could slow growth there.

Against this backdrop, South Africa could not take reckless decisions about its fiscal policy and must concentrate on its economic objectives. National Treasury had therefore needed to revise its approach if the 5.5% growth target was to be achieved by 2010. The current account deficit was of concern, and efforts must be devised, implemented and maintained to reduce this deficit. If this was not done, inflation would be problematic by 2008.

Minister Manuel then added that the global economic trends were a concern to South Africa and the uncertainty called for prudence. The need to set funding aside for the leaner times would require a combined approach and so the temptation to use the current budget surplus must be resisted strongly.

Mr B Mnguni (ANC) referring to page 19 of the report, said that it seemed to him that there was some scepticism about broad based black economic empowerment, (BBBEE). He commented also that the increase in prices was disadvantaging the poorest of the poor.

Prof B Turok (ANC), referring to page 23, said that there seemed to be a move against tariff reduction in coming years. He continued that the economies of the USA and Europe had been built on tariff protection but there were calls within and outside South Africa for it to reduce the tariffs, and there was a need to determine what effect such reductions would have on emerging industries, which could be BBEEE- reliant. With regard to the current account deficit, he asked whether there could not be a ban or embargo on imported luxury goods so that money would not flow out of the country.

Mr K A Moloto (ANC) said that in this and in previous years, companies, particularly the construction companies, were seeking listings on the stock exchanges, but that the benefits from these companies were not flowing down to the workers, who remained as poor as ever. On page 20 of the report there was mention that the construction industry was reliant on government contracts and it seemed to him that the workers were not benefiting from their own government’s money.

Minister Manuel replied broadly to the points raised, and expanded on some statements.

He said that page 19 had tried to sketch the position broadly. BBBEE and economic empowerment were constitutional imperatives at present, and were not optional; however, both policies must match the political and economic realities, and this was to be found in the detail. This meant that both government and the private sector must take extraordinary measures in the short term. Some might regard this view as cynical, but any excesses must be worked out in the principle of supply chain management, where tenders were called for and must be motivated and justified. This he saw as quite fundamental. Three major challenges remained – of job creation, the need to ensure that South Africa must not mortgage its future, and entrepreneurship, which he did not view as being in the right place at the right time with the right connections, but which rather involved risk-taking business activities.

The Minister then addressed himself to the issue of the gap between the repo rate and the rate of interest charged by lenders. He added that the Competition Tribunal had looked at the banks, the Jali Commission was currently engaged upon further investigation, and it was hoped that the Commission’s report would be available shortly. There was a need for trust in the banking environment. The public had to be able to trust the banks, and the banks had to be able to trust the environment in which they operated, failing which they would go elsewhere for business. He said that it must be constantly borne in mind that “capital was a coward and would flee at the first sign of uncertainty”.

Referring to the sub prime mortgage problem in the USA, Minister Manuel stated that somebody had to pick up the tab. Already $ 25 billion had disappeared from the balance sheets and he felt there was a need to act with caution. He pointed out that already one million American homes had been foreclosed upon for non-payment of the mortgage instalments, and the largest numbers of those who had lost their homes and property were Afro-American or Hispanic. He suggested that South Africa should not break its system and must be very cautious about its approach.

Addressing Prof Turok’s questions Minister Manuel pointed out that that the anniversary of the Seattle Conference was approaching. Although the media, for one reason or another, was taking its own line, the World Trade Organisation (WTO) was trying to extend the benefits to South Africa, who for its part was making this difficult. What he saw as the solution was not an increase in tariffs or protective customs documents, which in any event needed to be simplified so that they could readily be understood by the ordinary man in the street. The world currently needed skills and capital, neither of which were influenced by sermons on loyalty. Skills around the world were fluid, as illustrated by the fact that the head of the USA Aeronautics Programme was a Mali national. The African diaspora was in effect only a huge skills transfer, and countries like South Africa must install programmes to retain homegrown skills. It must be borne in mind at all times that there was an integrated world economy and there was a need to work within this reality, and not delude ourselves. He added that currently eight out of ten Springbok rugby memorabilia items were counterfeit, and he wondered how such items got into the country. The current account deficit was the most pressing problem.

Minister Manuel stated that Moody’s Investor Services had just issued its re evaluation of the country. One had to remember that the evaluation agencies were under extreme pressure as well, but he drew to the attention of the Members that the media reports about Moody’s evaluation on South Africa differed greatly from the actual report. He would arrange for the report to be copied and handed to Members. As regards the global uncertainty he pointed out the head of one of the oldest banks in America had been invited to leave because of a deficit of $8 billion.

With regard to BBBEE he pointed out that the construction industry was under pressure to comply with BBEEE but was also under pressure to complete the stadia and other facilities by 2009, in time for the Confederations Cup, prior to the 2010 FIFA World Cup matches. Whilst in theory the stadia could be built by picks and shovels, the logistics and realities of the time frames required use of bulldozers and other mechanical equipment. He added that risk was an essential accompaniment to real entrepreneurial skills and must be recognized and rewarded.

Mr Kganyago said that the economy was a double-edged sword and what was successful on one side might kill off the economy on the other. He called for a cautious approach. He said that one currently held view was that South Africa was like a house, and the current account deficit could be overcome or handled by an increase in the access bond, following which everything would be fine. However, increasing the access bond meant increased mortgage payments to be met, and the current account deficit was to be viewed accordingly. He emphasised that a long-term view was necessary and that what was important was not next month’s events, but to look to 2020 or the years after that.

Mr M Swart (DA) said that the flow of capital seemed to show a real risk, and asked what could be done.

Mr J Bici (UDM) asked whether unemployment could be below 20% by 2020, what its actual rate was at the moment, and, arising from that, what were the opportunities for creating employment

Mr N Singh (IFP) asked whether the non-performing departments of State could be dealt with in the same way as had applied in Kwazulu Natal, and whether those not providing services could be or had been identified so that remedial action could be taken.

Ms J Fubbs (ANC) said that it seemed to her that extortionate profits were made by companies, and she wanted to know how such profits could be secured, as she was of the opinion that the companies were making no paybacks. She noted that page 7 of the report seemed to indicate a huge skills problem, and asked what was being done about it.

Minister Manuel repeated that the sub-prime mortgage problem in the USA was huge, and what was required was trust. The economy could not advance unless the decision makers could trust the end users to pay their dues. In answer to Mr Bici, he noted that the unemployment rate was currently 25.5% but one must ask the reasons for this, and although there was no one simplified answer, part of the reason related to lack of skills. Learners tended still to opt for what they perceived as the easiest subjects, viewing mathematics and science as too difficult. The economy required facilities in mathematics and science, and so even though there were attempts at public works projects for the unskilled there was little progress in reducing the number of unemployed.

Minister Manuel said that non-performing departments of State were a matter of leadership. Citing his own Department, he stated that no Treasury employee could embark upon overseas travel without his approval. Two members of his Department had applied for overseas travel, but received news that he had not approved of the request only when they were in the plane, which was warming up for departure on the apron of the runway. He had them removed from the plane, and they did not proceed overseas. He was of the opinion that other Ministers should display the same interest in their departments and micro-manage them. Mr Manuel was served by an absolutely dedicated staff, at all levels, but most importantly by those who reported directly to him. He would get a response from them no matter what time of day or night. They were dedicated to serving South Africa, not for their salary, which of course they could better were they to move to the private sector, but knowing of the benefit they brought to the vast majority of citizens. Until this was the common approach there would be under-performing State departments. Similar action as had been taken against Kwazulu Natal was indeed being contemplated.

Mr Kganyago addressed himself to the question posed by Ms Fubbs. He said that unless there was a chance of reward there would be no economic activity, and profit and skills were intertwined. There was freedom of choice and if a person, for whatever reason, chose not to skill himself or herself, then that person must pay the price.

Mr Manuel intervened and said that in the exuberance of the bull markets it was frequently forgotten that there was always a bear market around the corner. People entered the bull market, either as direct and immediate players or at a more removed level, and made money; then as soon as the bear market took over, losses were made. Generations down the line tended not to have memories of the worse times, those entrusted with budgets must remember this at all times.

Mr M Johnson (ANC) asked about increased allowances, although he realised this was not a mini-budget, the drain by South African Airways, which was taking more money each year, and the campaign against bureacracy.

Ms N Mokoto (ANC) asked about the punishment of consumers by raising the interest rates and the possibilities of equilibrium for the household budgets as against the current account deficit.

Mr Manuel noted that the increase in food price was to be viewed against global inflation. As regards unemployment, he said the answer was in the hands of the youth, who must take it upon themselves to embark upon mathematics and science rather than some of the easier courses. However, he added that progress was being made with the Further Education and Training (FET) colleges to redirect some of their students. He explained to Ms Fubbs that entrepreneurship entailed risk, which must be rewarded, and was not a policy issue.

The Minister added that micro economics may be likened to learning a musical instrument, whereby practice led to increased skills. Proper micro-economic management could be likened to putting an instrument player skilled in his own right among many other players of other instruments, and ensure that the orchestra together produced a pleasing sound. If any part was out of kilter all that was produced was a cacophony of sound.

Minister Manuel noted that that had been critics who regarded the Public Finance Management Act (PFMA) as hindering development and service delivery. They had been asked to identify those parts of the PMFA that did hinder development or delivery but none could do so, and thus the allegations of hindrance remained unsubstantiated. The operation of tenders in the supply chain management links may pose some hindrance to certain tenderers. Minister Manuel requested the Members to re-read the report, and then revert to him after considering it for further discussion or the need for change in any direction.

Mr Kganyago said, in relation to South African Airways, that some hard questions needed to be asked as to whether South Africa needed a national carrier, or any other State Owned Enterprise, and what were the returns.

In relation to interest rates, Mr Kganyago noted that there were always two sides to the story. Those paying a mortgage would complain, but those reliant on their savings as an income would not. Fiscal policy considerations could not always be used for microeconomic policies

Mr Singh asked whether the surplus could not be directed to two or three identified priorities, or emergencies or even to Eskom, to restrain tariff increases.

The Minister said that the R2.3 billion surplus came from intended savings in State expenditure and had to be very jealously preserved. It simply could not be frittered away unproductively. There was no knowing where the world global economy was destined. In summary, with regard to salaries and expenditure he was of the opinion that dedication was required, and that hard questions must be asked and answered.

The meeting was adjourned






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