ATC131030: Report of the Standing Committee on Finance on the 2013 Revised Fiscal Framework dated 30 October 2013

Report of the Standing Committee on Finance on the 2013 Revised Fiscal Framework dated 30 October 2013

1.         Introduction

Section 12 (3) of the Money Bills Amendment Procedure and Related Matters Act, Act No. 9 of 2009 (Money Bills Act), requires that the Minister of Finance must table a revised fiscal framework with the national adjustments budget if the adjustments budget effects changes to the fiscal framework. In terms of section 12 (5) of the Money Bills Act, the revised fiscal framework must be referred to a joint sitting of the Committees on Finance for consideration and report.

On 23 October 2013, the Minister of Finance tabled the 2013 fiscal framework with the Medium Term Budget Policy Statement (MTBPS) in Parliament. Section 12 (7), states that the Committees on Finance must 9 days after the tabling of the national adjustments budget submit a report on the revised fiscal framework to the respective houses of Parliament for consideration and adoption.

The Standing and Select Committees on Finance jointly conducted public hearings on the revised fiscal framework on 29 October 2013. These hearings were held together with the Business Unity South Africa (BUSA), National Union of Metalworkers South Africa (NUMSA) and the Solidarity Research Institute.

According to the Minister of Finance, the MTBPS sets the economic context for the next budget, explains fiscal policy and presents a three-year spending framework. The MTBPS further outlines government’s intent to, amongst others, keep government debt at a sustainable long term path and implement the National Development Plan (NDP). The Plan provides a platform for increased collaboration between government, business, labour and civil society. Such cooperation on South Africa’s goals is expected to boost consumer and business confidence and translate into higher levels of investment, employment and growth.

The fiscal framework gives effect to macro-economic policy for the next three years, striking a balance between consolidation and service delivery. This report summarises the economic outlook; fiscal policy and trends and the key issues emerging from the public hearings with the identified stakeholders.

2.         Economic Outlook

2.1          Global economic outlook

There are signs of improvement in the world economy, though economic activity remains subdued. Economic growth is improving in advanced economies while growth continues in the emerging markets, at a slower rate. Monetary authorities in the developed economies maintained exceptionally low interest rates to support economic activity. Recovery of manufacturing sentiment in advanced economies is expected to boost growth in 2013. The slowdown in emerging economies has led to a decline in commodity prices.

The International Monetary Fund (IMF) expects global economic growth to average slightly more than 3 per cent over the medium-term. These forecasts assume a stronger United States (US) economy as fiscal consolidation eases and monetary conditions stays supportive, reduction in fiscal tightening (except for Japan) and highly accommodative monetary conditions.

Table 1: Annual % change in GDP and consumer prices in selected countries 2012 - 2014

Region / country	2012	2013	2014	2012	2013	2014
Percentage	GDP projections1			Consumer price index projections1
World	3.2	2.9	3.6	4.0	3.8	3.8
Advanced economies	1.5	1.2	2.0	2.0	1.4	1.8
US	2.8	1.6	2.6	2.1	1.4	1.5
Euro area	-0.6	-0.4	1.0	2.5	1.5	1.5
UK	0.2	1.4	1.9	2.8	2.7	2.3
Japan	2.0	2.0	1.2	0.0	0.0	2.9
Emerging markets and developing countries	4.9	4.5	5.1	6.1	6.2	5.7
Brazil	0.9	2.5	2.5	5.4	6.3	5.8
Russia	3.4	1.5	3.0	5.1	6.7	5.7
India	3.2	3.8	5.1	10.4	10.9	8.9
China	7.7	7.6	7.3	2.6	2.7	3.0
Sub-Saharan Africa	4.9	5.0	6.0	9.0	6.9	6.3
South Africa2	2.5	2.1	3.0	5.7	5.9	5.6

1. IMF World Economic Outlook October 2013
2. National Treasury Forecasts

Economic conditions are improving in the Euro area, with Gross Domestic Product (GDP) growth projected to register 1.0 per cent in 2014, compared to a contraction of 0.4 per cent estimated for 2013. Broad recessionary conditions persist in Europe and weak economies on the periphery are likely to hold back growth. According to the IMF, risks in the Euro area remain unfinished business of restoring bank health and credit transmission as well as corporate debt overhang.

GDP growth in the US economy is expected to average 2.6 per cent in 2014, up from an estimated 1.6 per cent in 2013, assuming slower fiscal consolidation and low interest rates. The forecasts assumed that discretionary public spending is approved and the debt ceiling is raised promptly. The prospect to reduce monetary accommodation in the US would directly affect the global economy, in general.  As the US tapers its quantitative easing programme and starts to raise interest rates, this will impact on the South African debt costs and might cause further volatility with the Rand. Business Unity South Africa (BUSA) shares the same sentiments and notes a possible increase in the cost of capital as well.

The Japanese outlook remains uncertain despite strong monetary policy and fiscal stimulus. The economy is expected to grow at a constant rate of 2 per cent in 2013 as was the case in 2012 and decline to 1.2 per cent in 2014, due to tapering of fiscal and monetary support, higher consumption taxes and lower construction spending.

The emerging market and developing countries are expected to expand by 5.1 per cent in 2014, despite vulnerability to capital flow volatility. Growth in China is slowing and that may have consequences for other economies, particularly commodity exporters including South Africa. In 2013 GDP growth in China is forecast at 7.6 per cent compared to 9.3 per cent in 2011, expected to slow moderately to 7.3 per cent in 2014. China needs to rebalance growth away from investment towards higher household consumption to support long-term growth.

Economic activity in sub-Saharan Africa remains robust, with growth projected to increase from an estimated 5 per cent in 2013 to 6 per cent in 2014.  Continued growth is supported by growing investment and rising household incomes. Expanded agricultural production and retail services, rising oil production and increased mining activity will expected to underpin strong growth over the medium term.

Global economic activity is expected to strengthen moderately over the medium term subject to a high degree of risks. The outcome of the US fiscal policy debates and the timing of the Federal Reserve’s decision to wind down its asset purchase programme will affect the global economic and financial environment. These outcomes have the potential to lower US growth, reduce capital inflows into emerging markets and increase global borrowing costs. The emerging markets are exposed through capital flows, currency depreciations and balance of payments risks. Lower commodity prices may pose challenges for many countries in sub-Saharan Africa.

2.2          Developments in the South African economy

The South African economy recovered quickly from the 2009 recession and grew by 3.1 per cent and 3.5 per cent in 2010 and 2011, respectively. According to the IMF, mining strikes shaved off 2 percentage points of exports and a 0.5 percentage point of GDP growth in 2012. The rate of growth has steadily declined to a projected 2.1 per cent in 2013. Commodity prices have declined from historically high levels and limited availability and rising costs of electricity, labour disputes, rising unemployment, lower household consumption, weak business confidence and lower private sector investment weighed down on economic growth.

Prudent macroeconomic policy has provided support to the economy and reduced exposure to volatility. Countercyclical fiscal policy, following the fiscal stimulus packages implemented since 2008, resulted in a widening budget deficit, increased borrowing and a period of slow growth. Monetary policy has provided a low interest rate environment to encourage capital investment and assist households.

The costs of borrowing in bond markets increased and the exchange rate weakened significantly. Foreign exchange reserves have risen from US$34.1 billion at the end of 2008 to US$47.9 billion at the end of August 2013 due to effective regulatory oversight of the financial system.

South Africa’s current account deficit widened, reflecting lower levels of domestic savings and imports exceeding exports. This means that the economy is reliant on foreign savings to fund the gap between government revenue and spending and the cost of infrastructure expansion.  The deficit has been comfortably financed by capital inflows, signalling confidence of investors in the country’s economic prospects. South Africa’s policy choices provide flexibility to adjust and weather short term volatility.

Government is working to implement the NDP, manage medium term risks and enact structural reforms to the economy. The Plan prioritises measures to build a capable, effective state that delivers services to citizens while encouraging business investment and economic growth. Government recognises that South Africa cannot rely on external developments to alleviate domestic growth constraints. Over the next three years, South Africa will have more electricity, rail and roads to support growth.

BUSA supports the point of departure in the MTBPS that the NDP is now a framework within which policies and projects will be increasingly aligned. It is the view of business as it is of the NDP that key stakeholders need to collaborate and cooperate on a much bigger scale to address the socio-economic challenges facing South Africa.

NUMSA is concerned that, 2013 marks the centenary of the 1913 Land Act and that government failed to successfully redistribute land ownership according to its own targets but the 2013 MTBPS has overlooked this important matter.

2.3          Domestic economic trends and outlook

The National Treasury expects the South African economy to grow by 2.1 per cent in 2013 (0.7 percentage point  lower than a February 2013 forecast of 2.7 per cent and shaved off 1 percentage point of an October 2013 MTBPS estimate of 3 per cent). The 2013 MTBPS expects the rate of economic growth to accelerate to 3 per cent in 2014 and to 3.5 per cent in 2016. There is close convergence between the economic forecasts of the National Treasury and BUSA.

The economy is expected to be buoyed by improvements in global economic conditions and strong regional growth. Continued investment in infrastructure is expected to reduce supply constraints, help crowd in investment and allow for more production and employment. The weaker exchange rate will support the profitability of mining and competitiveness in the manufacturing sector. Supportive fiscal, monetary and financial management policies will continue to support economic growth over the medium term. China’s transition from investment-led growth, with a larger role for household consumption, is expected to open up new opportunities for South African manufactured exports.

South Africa’s economic prospects remain closely linked to global developments. The real economy is expected to strengthen gradually over the medium term. Implementation of the National Development Plan will alleviate some structural constraints, strengthen growth and accelerate job creation while broadening social development and economic participation. The pace of economic recovery will depend largely on the rate at which private investment and export growth strengthen. In line with the NDP, BUSA’s view is that South Africa should concentrate on the domestic factors over which it has control to move forward with planned structural reforms to boost growth and create jobs.

All sectors of the economy have shown a slowdown in economic activity in response to subdued global economic growth and supply side disruptions. Production stoppages have been most pronounced in mining and manufacturing.  Contraction in the mining sector, muted growth in manufacturing, weaknesses in the services sector, a deceleration in consumer spending weighed down economic growth.

Mining remains a key sector in the domestic economy in terms of economic activity, job creation and revenue collection. Mining production increased at a rate of 14.6 per cent in the first quarter of 2013 and contracted by 5.6 per cent in the second quarter, reflecting high levels of volatility in the sector, particularly in the production of platinum and diamonds. Increased safety stoppages, escalating cost pressures, sporadic labour disruptions and infrastructure challenges negatively affected production.

Manufacturing is a driver of innovation, productivity and competitiveness, making the sector critically important for growth and development. Real output of the manufacturing sector rose at a rate of 11.5 per cent in the second quarter of 2013, having contracted by 7.9 per cent in the first quarter of 2013. Second quarter growth can be attributed to more stable global economic conditions, lower exchange value of the Rand and normalisation of output following refinery maintenance and temporary industrial action weighing on production.

Growth momentum in the agricultural sector remained relatively strong in the first half of 2013, registering 3.6 per cent. Over the medium term, agriculture will be supported by continued growth in African markets and better integration of small scale farmers. Growth in the services sector remains subdued, having recorded 2.2 per cent in the first half of 2013, relative to the same period last year. A tight electricity demand supply balance is expected to persist until the second half of 2014, limiting the ability of the economy to expand.

Household consumption expenditure averaged 3.5 per cent in 2012 having decelerated from 4.8 per cent in 2011. Household consumption is a key driver of the economy, accounted for 61 per cent of GDP in the second quarter of 2013, according to the South African Reserve Bank (SARB). National Treasury projects household consumption to average 2.5 per cent in 2013 and register 2.9 per cent in 2014 as a result of decelerating disposable income growth, high debt burden, tightening lending conditions and rising inflation. Household disposable income slowed to 2.6 per cent in the first half of 2013, from 4 per cent a year earlier.

Domestic inflation remained within the inflation target range for 14 consecutive months to June 2013 against the backdrop of subdued global and domestic output growth. Headline Consumer Price Index (CPI) is expected to remain within the target band of between 3 and 6 per cent over the medium term, averaging 5.9 per cent in 2013. Growth in food, petrol and administered prices is expected to slow down but weaker currency might put pressure on inflation in 2013. Inflation expectations are expected to remain anchored around the upper end of the inflation target range.

Table 1: Macroeconomic projections 2009 to 2015

Calendar year	2 010	2 011	2 012	2013	2 014	2 015	2 016
Percentage  change unless otherwise indicated	Actual			Estimate	Forecast
Final household consumption	4.4	4.8	3.5	2.5	2.9	3.2	3.4
Final government consumption	5.0	4.6	4.2	3.4	3.4	3.0	3.3
Gross fixed capital formation	-2.0	4.5	5.7	4.1	5.0	5.5	6.3
Gross domestic expenditure	4.4	4.6	4.1	2.7	3.2	3.4	3.8
Exports	4.5	5.9	0.1	6.1	5.0	6.7	7.0
Imports	9.6	9.7	6.3	7.3	5.2	6.4	7.0
Real GDP growth	3.1	3.5	2.5	2.1	3.0	3.2	3.5
GDP inflation	7.2	6.0	5.5	5.9	5.9	5.7	5.7
GDP at current prices (R billion)	2 659.4	2 917.5	3 155.2	3 411.7	3 720.2	4 061.7	4 443.7
Headline CPI inflation (Dec 2012 = 100)	4.3	5.0	5.7	5.9	5.6	5.4	5.4
Current account balance (% of GDP)	-2.8	-3.4	-6.3	-6.5	-6.4	-6.2	-6.1

Source: Reserve Bank and National Treasury

In 2012, the total Gross Fixed Capital Formation (GFCF) expanded by 5.7 per cent compared to 4.5 per cent realised in 2011.  Growth in real GFCF slowed to 4.1 per cent in the first half of 2013, compared to the corresponding period in 2012. Unplanned delays and sluggish uptake of new projects slowed investment by public corporations. The outlook for investment expenditure remains positive over the medium term. Gross Fixed Capital Formation is forecast to grow at a rate of 3.5 per cent in 2013 reaching 5.3 per cent in 2016, supported by higher levels of domestic and global demand, relatively low borrowing costs, continued implementation of the national infrastructure programme and improved business confidence.

Job creation prospects will depend largely on the private sector hiring.  Employment by the private sector is not sufficient to absorb new entrants into the labour market and reduce the high rate of unemployment. A risk also identified by BUSA. Employment remains slow in recovering to levels attained before the economic crisis. Employment grew at an average of 0.8 per cent between 2010 and 2012, leading to an increase in the unemployment rate to 25.6 per cent in the second quarter of 2013. The quarterly Labour Force Survey shows that in the year to July 2013, employment increased by 274 229 jobs. Gains in the public and financial sectors were offset by employment losses in mining, manufacturing and construction.

Government initiatives are underway to promote economic participation and job creation. These include improving education sector and skills development, continued Expanded Public Works Programme (EPWP), tabling of an employment incentive proposal to encourage youth employment. BUSA is concerned that, the MTBPS, the NDP and other policies emphasise the importance of SMME’s and emerging business but no targets are set, for example 2 million new enterprises by 2030 to create 11 million jobs. BUSA proposed that government and the private sector should work together to support entrepreneurship and set targets for jobs.

In real terms, exports dropped from 5.9 per cent in 2011 to 0.1 per cent in 2012, while imports increased by 6.3 per cent in 2012. This reflects slowing global demand, falling prices of some major commodity exports, rand volatility and the impact of extensive disruption in the mining sector. Import growth is expected to remain resilient as investment in infrastructure and capital equipment accelerates. Trade deficit widened in the first half of 2013 as export revenue was held back by lower commodity prices and slower growth in the volume of non-gold exports.

The deficit on current account of the balance of payments, a source of external vulnerability, widened to an estimated 6.5 per cent of GDP in 2013. Strong demand for government bonds and other investments has financed the deficit. Current account deficit is projected to remain elevated at 6.5 per cent of GDP over the medium term as investment growth continues to outpace increases in domestic savings. Net capital inflows into South Africa declined by 4 per cent in the first half of 2013 compared to the same period in 2012. Weaker capital inflows reflect pull back from emerging markets. BUSA has identified capital inflow reversal as a risk that exposes South Africa to swings in investor sentiment. BUSA proposed a policy of higher SARB foreign exchange reserves to lower balance of payments risks.

The Rand’s exchange value declined from R8.79 to the US dollar in January 2013 to R9.98 in September 2013. The real effective exchange rate has depreciated by 11.7 per cent over the year to July 2013. The weaker Rand is expected to support mining and manufacturing exports, provided the depreciation is sustained. Sentiment towards the Rand gets affected by domestic factors such as the industrial action in the mining sector, higher current account deficit, weak business and consumer confidence and credit rating downgrades. The South African Rand was among the emerging-market currencies that were negatively impacted by the “tapering” remarks of the US Federal Reserve in May 2013.  Movements in the Rand will continue to reflect global risk appetite and investor sentiment towards South Africa and the possible scaling of the US asset purchase programme.

The deficit on the current account, which has been mitigated by the flexible exchange rate and the fiscal deficit pose a risk to the macroeconomic outlook.

3.         Fiscal policy and trends

3.1          Fiscal policy stance

A year ago, government underlined the need to secure the country’s fiscal footing, striking a balance between fiscal consolidation and a premature withdrawal of support for the economy. The 2012 MTBPS pointed out that if the economic and fiscal outlook were to deteriorate, a reconsideration of expenditure and revenue plans would be warranted. South Africa has several strengths that limit the vulnerability of its fiscal position.

South African fiscal policy remains anchored within the principles of counter-cyclicality, debt sustainability and intergenerational fairness. Accordingly, Government set three fiscal goals, namely, moderating expenditure growth to expand public services at a sustainable pace; stabilising debt and improving the impact of public spending by prioritising capital investment and reducing waste and inefficiency.

NUMSA believes that the countrywide implementation of the National Health Insurance (NHI) should be fast tracked as the slow progress and the absence of a coherent health policy framework is problematic considering the enormity of South Africa’s health care challenge.

South Africa’s macroeconomic policy framework remains well-grounded. Credible monetary policy and flexible exchange rate enable the economy to adjust to external shocks. Financial markets are liquid and financial institutions are generally well managed. Levels of foreign currency denominated debt are low, reducing exposure to exchange rate shocks. Corporate and public balance sheets are robust, and household debt levels, though high, are declining.

Recently, the economic and fiscal outlook has weakened. Economic growth rate has been revised down since the 2013 budget, leading to lower revenue projections. Commodity export prices have declined, historically low bond yields have started to rise, putting additional pressure on interest costs. Reliance on foreign investors to finance the budget deficit has increased.

Space for counter-cyclical policy interventions has narrowed. The deteriorating current account deficit and increasing debt-to-GDP ratio underscore the need for further fiscal consolidation. Domestic demand slowed and unemployment remains high, further justifying the need to maintain fiscal support to the economy.

Despite weaker economic growth in 2013, tax revenue collection remained resilient. Nonetheless, expected gross tax revenue for 2013/14 has been revised down by R3 billion to R895 billion. Personal income and corporate income tax and taxes on imported goods have been buoyant. Secondary tax on companies has been revised down by R5.9 billion to R17 billion in 2013/14 because this year’s sharp depreciation of the Rand in 2013 is unlikely to result in a sustained surge in company profits. Lower domestic VAT and excise duties point to reduced consumer demand and weaker income tax collection over the medium term. Lower revenue growth is expected over the medium term as a result of slower economic growth than projected during February 2013.

National Treasury expects the Tax Review Committee’s recommendations to inform tax policy changes going forward. The Committee’s first report on small and medium-sized business will be submitted before the end of this year. BUSA supports the work of the Committee in terms of reviewing the tax system and tax structure and wishes that the tax decisions will be put on hold until the Committee has developed the Terms of Reference.

In light of the deteriorated outlook for economic growth and revenue, government remain committed to maintain spending within the previously announced limits. Expenditure limits are extended into 2016/17. The implementation of cost containment measures from 01 December 2013 will restrict public sector air travel, car hire, catering, overseas delegations, and entertainment and conferencing costs. Over the long term government will rebuild fiscal space by stabilising and reducing debt to GDP ratio.

NUMSA welcomes the measures to reduce costs and eliminate wasteful expenditure including reducing expenditure on consultant services. NUMSA is of the view that the proposed measures are minimal and that more severe measures to address corruption, fraud, misappropriation of public funds and non-compliance with procurement policies and regulations are required. The proposed measures to reduce spending on consultants include the monitoring of consultants and avoidance of duplication of work and studies done across government departments.

3.2          Fiscal Framework

The 2013 MTBPS balances fiscal consolidation with support to the economy. The proposed fiscal framework will:

·         Meet the 2013/14 deficit target of 4.2 per cent, with no additional resources been added to spending plans over the MTEF;

·         Narrow the deficit going forward in order to stabilise debt at 44 per cent in 2016/17.

·         Grow expenditure at 2.2 per cent in real terms within a clear expenditure ceiling; and

·         Contain growth on wages and goods and services in order to stabilise debt and begin rebuilding fiscal space.

Revenue of R999.7 billion in 2013/14 financial year has been set aside, reflecting a slight upward increase of R13.4 billion compared to the February 2013 estimate. Over the medium term, government expects total consolidated revenue of R3.576 trillion, R1.086 trillion (revised up by R4.8 billion) in 2014/15, R1.184 trillion (revised up by R15.6 billion) in 2015/16 and R1.306 trillion in 2016/17.

The 2013 Budget was the first since 1999 that did not add resources to the previously announced spending plans. Given the outlook for economic growth and revenue, government is reinforcing its commitment to maintain spending within previously announced limits. Since the introduction of the expenditure ceiling, forecasts and outcomes have been more closely aligned. The limit on main budget non-interest expenditure is also extended in the revised MTEF to include 2016/17.

Table 2: Consolidated fiscal framework

	2010/11	2011/12	2012/13	2013/14	2014/15	2015/16	2016/17
R billion	Outcome			Estimate	Medium-term estimates
Operating account
Revenue	764.7	843.5	907.6	998.9	1 086.1	1 184.0	1 305.8
Current payments	756.3	837.7	919.1	1 008.6	1 086.3	1 165.7	1 247.6
Compensation	309.9	345.5	375.4	409.0	437.2	466.9	498.9
Goods and services	137.2	153.7	165.1	178.6	188.2	198.1	211.8
Interest and rent on land	75.3	81.8	93.2	106.6	116.6	128.8	141.0
Transfers and subsidies	233.9	256.7	285.4	314.3	344.3	371.9	395.8
Current balance	8.4	5.9	-11.5	-9.6	-0.1	18.3	58.3
Percentage of GDP	0.3%	0.2%	-0.4%	-0.3%	0.0%	0.4%	1.3%
Capital account
Capital receipts	0.4	0.2	0.3	0.2	0.2	0.2	0.2
Capital payments	55.7	61.2	68.0	75.7	87.9	95.6	101.7
Capital transfers	45.4	49.7	52.5	55.8	63.3	70.1	72.9
Capital financing requirement1	-100.8	-110.6	-120.1	-131.4	-151.1	-165.6	-174.4
Percentage of GDP	-3.7%	-3.7%	-3.7%	-3.8%	-4.0%	-4.0%	-3.8%
Financial transactions2	2.3	2.8	3.3	3.6	3.3	3.0	0.0
Contingency reserve	–	–	–	–	3.0	6.0	18.0
Budget balance	-114.7	-107.5	-135.0	-144.6	-157.5	-156.3	-134.2
Percentage of GDP	-4.2%	-3.6%	-4.2%	-4.2%	-4.1%	-3.8%	-3.0%
Revenue	65.0	843.8	907.9	999.1	1 086.3	1 184.2	1 306.0
Expenditure	79.7	951.3	1 042.9	1 143.7	1 243.8	1 340.4	1 440.2
Non-interest expenditure3	804.4	869.5	949.6	1 037.0	1 127.2	1 211.7	1 299.2
Interest payments	75.3	81.8	93.2	106.6	116.6	128.8	141.0
Primary balance4	-39.4	-25.8	-41.7	-37.9	-40.9	-27.5	6.8
Percentage of GDP	-1.4%	-0.9%	-1.3%	-1.1%	-1.1%	-0.7%	0.1%

Source: 2013 MTBPS, National Treasury

1. Includes payments for capital assets, receipts from sale of capital assets and capital transfers

2. Transactions in financial assets and liabilities

3. All spending except for consolidated interest payments

4. Revenue less non-interest expenditure

The 2013 consolidated fiscal framework makes R1.144 trillion available for spending in 2013/14 (slightly lower than R1.149 trillion estimated during the National Budget 2013 period). The consolidated fiscal framework makes R1.244 trillion (revised up by R94.4 billion) available for spending in 2014/15, R1.340 trillion (revised slightly up by R96.4 billion) in 2015/16 and R1.440 trillion in 2016/17 financial year. Over the next three years, in real terms, non-interest expenditure is expected to grow at a moderate average rate of 2.2 per cent compared to 2.3 per cent projected in February 2013. The fastest growing expenditure item in the consolidated framework remains interest payments, reflecting the substantial increase in government’s debt stock in recent years.

The budget deficit is now estimated to be 4.2 per cent of GDP in 2013/14, in line with the projection made at the time of the 2013 Budget. The deficit will narrow to 3 per cent of GDP in 2016/17, as economic activity accelerates, expenditure growth slows down and revenue collections gather pace. Inclusion of extraordinary receipts and payments implies a narrower budget deficit in 2013/14. The main budget deficit is offset by surpluses expected on the accounts of provincial governments, public entities and social security funds. According to BUSA, this could be a temporary situation because provincial surpluses, the result of under spending, will cease if provincial governments are encouraged to spend their budgets.

BUSA sees the MTBPS process as frank and transparent. The announcement to meet the 2013/14 fiscal deficit of 4.2 per cent of GDP is welcome and so is the plan to consolidate the deficit, the introduction of cost containment measures, introduction of tax legislation to incentivise business to employ youth, continued emphasis on improving access to finance and support services for small businesses and the fact that the fastest growing component of non-interest spending is capital spending.

The 2013 budget framework includes a contingency reserve of R27 billion over the medium term, R3 billion in the 2014/15, rising to R6 billion in the 2015/16 and R18 billion in 2016/17. The contingency reserve serves to finance any unforeseen and unavoidable expenditure not included in the baseline. It enables government to absorb risks, but remains lower in the beginning of the medium term.

3.3          Managing risks

Government will ensure that, over the medium term, the wage bill does not place expenditure at risk. Specific attention will be paid to restraining growth in administrative posts. Compensation budgets currently account for 39.4 per cent of consolidated non-interest spending. Growth in the public sector wage bill has exceeded the rate of inflation over the past several years. This was partly due to the implementation of Occupation Specific Dispensation (OSD). There is some evidence that the public sector employment growth has begun to slow, following the three-year wage settlement reached in 2011.

The weaker Rand exchange rate has pushed up the rand value of foreign-denominated debt. Inflation has also increased the revaluation value of inflation-linked debt. Deterioration in the economic growth outlook has increased the debt-to-GDP ratio. South Africa’s debt-to-GDP ratio remains sustainable. Government’s denomination of debt is mainly in domestic currency to limit external vulnerability. Net debt is projected to reach 39.3 per cent of GDP (R1.37 trillion) in 2013/14 and stabilise at about 43.9 per cent of GDP (R1.994 trillion) in 2016/17. Government will continue to build cash reserves and switch short term debt for longer term debt if market conditions allow.  BUSA is concerned that debt stabilisation level will be reached later than previously anticipated and at a higher percentage to GDP, contrary to the 44 per cent of GDP forecast for 2017/18.

The costs of servicing government debt are influenced by the volume of debt, new borrowing and market variables such as interest, inflation and exchange rates. Debt service costs continue to grow over the medium term, from R100.5 billion in 2013/14 to R135.4 billion in 2016/17.

The state owned companies are expected to borrow on the strength of their balance sheets, rather than being funded from the fiscus. State owned companies facing persistent difficulties will require operational restructuring to become financially sustainable to fulfil their mandates.

4.         Committee Observations

Having considered the 2013 MTBPS and public submissions, the Standing Committee on Finance observed that:

4.1          The global economic outlook remains uncertain, despite signs of improvement. Global economic activity is expected to strengthen moderately over the medium term subject to a high degree of risks;

4.2          Global economic developments and domestic factors narrowed the fiscal space available to Government over the medium term, elevating the level of debt;

4.3          South Africa’s economic prospects remain closely linked to global developments. The revenue forecasts are premised largely on macroeconomic projections, which are also dependent on global and domestic economic developments;

4.4          Prudent macroeconomic policy has provided support to the economy and reduced exposure to volatility. South Africa has limited fiscal space to maneuver but fiscal position remains sound, reinforced by accommodative monetary policy;

4.5          Welcomes the shifting of resources towards the implementation of the National Development Plan priorities, improving infrastructure allocations, and stepping up efforts to combat waste, inefficiency and corruption;

4.6          The effective and speedy implementation of the NDP might accelerate South Africa’s growth trajectory;

4.7          NDP implementation is largely supported, but it is concerned that some unions such as NUMSA have not yet endorsed the plan in its entirety;

4.8          Cabinet will decide on the details of cost-containment instructions that will be issued with the 2014 Budget;

4.9          The reforms are under way to enhance the private sector participation in the electricity sector, given the importance of the private sector on economic growth. Although government remains the key employer, about 80 per cent of jobs are provided by the private sector and 70 per cent of the overall contribution to economic growth is provided by the private sector;

4.10       South Africa is growing at a relatively lower rate than the African continent and that Business seems prepared to take a higher risk in Africa than in South Africa.

4.11       The Business community has been engaging with government on unlocking the SA economic growth potential, which is currently deemed to be below average. Business investigated key areas that can unlock growth and investment, of which, work streams and action plans will be presented in November 2013;

4.12       The financial sector reforms are now in implementation phase, with the Twin Peaks legislation to establish two new regulatory authorities to be submitted to Cabinet shortly;

4.13       The trade union Solidarity is of the opinion that tax increases are not a viable answer to current government and public sector problems. Furthermore, it remains their view that South Africa is on an unsustainable welfare state path. Not only is the welfare state financially unsustainable, but it is also crowding out market and civil society initiatives necessary to restore vibrancy and dignity to community life. According to Solidarity, South Africans should become eligible for tax rebates for private provision of government services where government failed to provide such services;

4.14       Solidarity is concerned that South African taxpayers are being taken for granted and that a very small number of taxpayers are responsible for paying a large part of entire tax revenue collected. Solidarity estimated that 130 000 of its members were responsible for a minimum of 5 per cent of the personal income tax paid to SARS in the 2011/12;

4.15       Solidarity is also concerned about the inefficiency of public expenditure and corruption by public office holders and indicated that the current public resistance to e-tolling implementation is not so much about the tolling of public roads as it is a general symptom of the larger tax situation in South Africa;

4.16       Noted progress regarding the appointment of the Chief Procurement Officer in the National Treasury, appointment of 3 Chief Directors, the completion of the macro structure and the work currently done regarding pricing;

4.17       NUMSA is pleased with the announcement that the rollout of the infrastructure programme will be “accompanied by programmes to support the local manufacture of components, ranging from buses to energy components” in order to support this industry and create more decent jobs;

4.18       Notes that the unemployment rate has slightly dropped by 0.9 per cent to 24.7 per cent in the third quarter of 2013, as released by Statistics South Africa (Stats SA);

4.19       Government initiatives underway to promote economic participation and job creation including the tabling of an employment incentive proposal to encourage youth employment;

4.20       An employment incentive proposal has been tabled to encourage youth employment and share the costs of job creation in special economic zones and targeted industries. This measure is expected to support about 200 000 jobs over the next three years; and

4.21       The Committee notes the effort to achieve energy security in the Eskom build programme. The Committee expresses concern with regards to the cost and time overruns in terms of the build programme and the resulting impact on the economy.

5.         Recommendations

Having considered the 2013 Revised Fiscal Framework and public submissions, the Standing Committee on Finance recommends that the House adopts the 2013 Revised Fiscal Framework and further recommends as follows:

5.1          Government  should intensify and strengthen its working relationship with business and labour in various sectors (labour organisations, unions, business, civil society and all other stakeholders) to build confidence within the economy, to reduce reliance on foreign investors to finance investment and create jobs;

5.2          The National Treasury should assess value for money, efficiency and effectiveness of all education related investment. Such assessment should include roll out of head count project piloted in Limpopo Province to the rest of the country;

5.3          The National Treasury should assist with the implementation of the NDP, and ensure that the departments align their strategic plans, Annual Performance Plans, Sector plans, delivery agreements and Budgets with the priorities and strategic objectives articulated in the NDP. The allocation of resources are in line with the NDP;

5.4          The National Treasury should accelerate the work of the Chief Procurement Office. National Treasury should submit to the House a progress report in this regard, within three months of the adoption of the report by the House;

5.5          One of the factors that led to South Africa’s economic growth lagging that of the emerging market economies could be the regulatory environment. National Treasury should consider using a regulatory impact assessment mechanism to better assess the impact of regulation on SMME’s;

5.6          The National Treasury should engage BUSA in analysing the studies made that contrasts the key drivers of economic growth in Africa. Furthermore, there is a greater need for interventions in terms of taking investment opportunities in the African continent;

5.7          Government through National Treasury should within the next two months provide clear mechanisms that will be used in dealing with the planned cost-containment measures, add more measures where necessary and adapt the further announced ones when practically necessary;

5.8          The National Treasury should provide Parliament with progress made with regards to the R9 billion Jobs Fund allocation for the employment creation program launched by the Minister of Finance on the 7 June 2011;

5.9          National treasury should report to the House on the approach to the allocation of the contingency reserve in the light of the allocation of the full R4 billion reserve in this year's MTBPS; and

5.10       The National Treasury should submit to the House a report on the recalibration of the budget deficit measure and include a comparison of the approach in other countries.

6.         References

6.1     BUSA, (2013), Business Unity South Africa: MTBPS Presentation to the Standing and Select Committee’s on Finance, Cape Town, 29 October 2013

6.2     NUMSA, (2013), National Union of Metalworkers of South Africa: Submission on the 2013 Medium Term Budget Policy Statement, Cape Town, 29 October 2013

6.3     Gordhan, P. (2013), Medium Term Budget Policy Statement Speech, Parliament of RSA, Cape Town, 23 October 2013

6.4     National Treasury, (2013) Medium Term Budget Policy Statement, Pretoria: Government Printers

6.5     Solidarity Research Institute, (2013) Submission to the Standing and Select Committee’s on Finance, 29 October 2013.

Report to be considered