ATC141030: Report of the Standing Committee on Finance on the 2014 Revised Fiscal Framework, dated 30 October 2014
Report of the Standing Committee on Finance
on the 2014 Revised Fiscal Framework, dated 30 October 2014
The Standing Committee on Finance, having
considered the 2014 Revised Fiscal Framework, reports as follows:
Section 12(3) of the Money Bills Amendment
Procedure and Related Matters Act, Act No. 9 of 2009 (the Money Bills Act)
requires that the Minister of Finance tables a revised fiscal framework with
the national adjustments budget if the adjustments budget effects changes to
the fiscal framework. Section 12(5) of the Money Bills Act requires that the
revised fiscal framework be referred to a joint sitting of the Committees on
Finance for consideration and report.
The 2014 revised fiscal framework, as part of the
2014 Medium Term Budget Policy Statement (MTBPS), was tabled in the National
Assembly by the Minister of Finance on 22 October 2014. The Financial and
Fiscal Commission (FFC), South African Reserve Bank (SARB), and Parliamentary
Budget Office (PBO) made submissions at the oral hearings on the MTBPS.
There is general
consensus amongst the analysts that global economic growth will continue to be
moderate and that growth will pick up momentum in the second half of 2014 and
in 2015. The International Monetary Fund (IMF) has revised downwards the 2014
and 2015 Gross Domestic Product (GDP) growth forecasts to 3.3 per cent and 3.8
per cent in 2015, respectively. Growth in emerging markets is expected to
expand by 4.4 per cent in 2014 and 5 per cent in 2015.
The revised growth projections envisage a rebound in
growth from both the advanced and emerging economies in the remainder of 2014
and in 2015. The IMF further assumed that geopolitical tensions would decline;
that activity in the United States and the Euro area would pick up and that the
emerging market economies would gradually lift structural impediments to
risks to the global economic outlook include geopolitical tensions; monetary
policy normalisation in the US; deflation; low growth turning into stagnation
in advanced economies as well as a decline in potential growth in emerging
Africa (SSA) is forecast to remain one of the fastest growing regions. Economic
activity in SSA remains robust, with growth projected to average above 5 per
cent over the medium term. The SSA outlook is subject to risks such as a widespread
contagion of Ebola in affected countries; heightened fiscal vulnerabilities; volatility
in the global financial markets and lower growth in emerging market economies.
The South African economy
is growing at a moderate pace and continues to perform below its potential. In
line with the IMF, the South African Reserve Bank (SARB) and the Bureau of
Economic Research (BER), the National Treasury has revised down its growth
forecasts to 1.4 per cent in 2014, from 3.6 per cent in 2011. Similar to other
analysts, the National Treasury attributed the economic slowdown to structural
constraints in the economy. These include electricity supply and transport
constraints, labour tensions and skills shortages. The Fiscal and Financial Commission
(FFC) identified further constraints to growth as education and health outcomes
while the Parliamentary Budget Office (PBO) identified the ability of spheres
to implement cost-stabilising measures as a further risk.
1: Macroeconomic performance and projections, 2011 2017
Economic growth is
expected to rise gradually over the medium term, reaching 3 per cent only in
2017. Moderate global growth; rising exports to the African Continent; the
easing of transport and logistics constraints; stabilisation of electricity
constraints and a recovery in private investment are expected to support
economic growth over the medium term.
The electricity and
transport constraints as well as labour stoppages have affected outputs in the
mining and manufacturing sectors. The manufacturing sector has struggled to
recover from the 2009 recession and the slowdown in Europe. Growth in
manufactured exports has risen, suggesting competitiveness and efficiency
gains. The share of mining as a percentage of GDP has been declining and the
sector accounts for just under 50 per cent of the countrys exports. The
agricultural sector has grown strongly in 2014, mainly due to large increases
in maize and livestock production, favourable weather conditions and higher
The pace of job
creation lags behind growth in the labour force, contributing to persistently
high levels of joblessness. The June 2014 Quarterly Labour Force Survey (QLFS)
conducted by the Stats SA showed that the official rate of unemployment
measured 25.5 per cent (from 25.3 per cent in the first quarter) and increases
to 35 per cent if discouraged job seekers are included. Weak employment outcomes
are reflected in slowing real disposable income and household consumption
Headline Consumer Price Index (CPI) remained
within the 3-6 per cent target range over the past four years and rose to 6.4
per cent in August 2014 due to a spike in maize and wheat prices coupled with
the impact of the weaker Rand on petrol prices. National Treasury and the SARB
expects Headline CPI to average 6.2 to 6.3 per cent in 2014, return and remain
within the target band over medium term. Risks to the inflation outlook include
exchange rate depreciation, higher electricity prices and possible
demands in excess of inflation
challenges, prolonged industrial action, a moderation in global demand and declining
commodity prices affected SAs export performance in the second quarter of
2014. The trade deficit deteriorated from 2.1 per cent to 2.8 per cent of GDP
in the second quarter of 2014. The current account deficit is estimated to
measure 5.6 per cent of GDP in 2014, declining to 5 per cent of GDP in 2017. Despite
increased volatility in financial and foreign exchange markets and the
downgrading by international credit rating agencies in the first half of 2014, the
balance of payments proved to be fairly resilient. Capital flows have been
sufficient to finance investment.
The low level of
domestic savings and high investment requirements, increase the economys
reliance on foreign capital flows, hence the twin deficits that are larger
than those of its emerging market peers. The twin deficits combined with
electricity shortages and low growth prospects are seen as key risks by
to the domestic outlook include volatility and capital outflows from the
emerging markets (current account deficit); weaker Chinese growth; lower
commodity prices, lack of structural reforms in emerging markets; weaker growth
outlook and domestic supply side bottlenecks.
2014 Fiscal Framework
South Africas fiscal policy is guided by the
principles of counter-cyclicality, debt sustainability and intergenerational
equity. Over the medium term, the focus will shift to debt sustainability,
efficiency and obtaining value for money in
Governments fiscal objectives aims to reduce budget
deficit; stabilise debt to ensure fiscal sustainability; continue to shift
spending towards governments priorities and contain expenditure on goods and
services and compensation of employees.
The 2014 consolidated
fiscal framework makes R1.2 trillion available for spending in 2015/16, R1.3
trillion in 2016/17 and R1.4 trillion in 2017/18 financial years. Revenue of
R1.055 trillion in 2015/16, R1.169 trillion in 2016/17 and R1.272 trillion in
2016/17 financial years have been set aside.
Treasury expects a revenue shortfall of R61 billion over the Medium Term
Expenditure Framework (MTEF) period, R10 billion of which will occur in
tax revenue collection is highly dependent on the developments in economic
conditions both at a global and domestic level.
National Treasury proposed to increase taxes, the
details of which will be informed by the recommendations of the Davies Tax
Committee Review report. These increases are expected to generate R44 billion
over the next three years.
The framework estimates a budget deficit of 4.1 per cent
of GDP in 2014/15, 3.6 per cent in 2015/16, narrowing further to 2.5 per cent
in 2017/18, as economic growth and revenue collection pick up pace.
2: Consolidated fiscal framework, 2013/14 2017/18
Governments net debt as a share of GDP continues to
grow, but the fiscal package is expected to stabilise debt at R2.4 trillion
(R45.9 per cent of GDP) in 2017/18, an increase of R590 billion. South Africas
debt-to-GDP ratio increase is comparatively high among the emerging markets.
Weak economic growth has entrenched a structural imbalance between revenue and
service costs for 2014/15 are expected to reach R114.5 billion, increasing to
R149.7 billion in 2017/18, the fastest spending growth of 9.3 per cent. Weaker
rand exchange rate pushes the value of foreign debt up; an increase in
inflation increases the value of inflation linked debt and weaker economic
growth impacts directly on increasing government debt.
Government has proposed a fiscal package with five elements, which are
aimed at narrowing the deficit and
over the medium term. These elements are reducing growth in spending; adjusting
tax policy and administration; emphasizing long term planning and efficient
resource allocation; freezing government personnel headcounts and adopting a
deficit-neutral approach to the financing requirements of state owned companies
over the next two years.
The main risks to the fiscal outlook are economic performance, public
sector wage bill and balance sheets of state-owned companies (SOEs). A further
deterioration in the GDP would require consideration of additional measures.
Deviations from the CPI-linked cost of living adjustments will require either a
reallocation of resources or a reduction in government employment.
Capitalization for SOEs will be funded from sale of non-strategic state assets
and will not be drawn from tax revenue.
Committee deliberations and observations
During the MTBPS briefing by the Minister of Finance and at the public
hearings, the Committee:
Noted with concern that there were no submissions on
the MTBPS from civil society organisations, despite extensive advertisements
and overtures made by the parliamentary committee secretaries; and that the
three organisations making submissions were all statutory bodies.
Appreciated the presentations made by the FFC, the SARB,
and the PBO, and noted that while a good overview of the MTBPS and a
macroeconomic picture are provided, these presentations do not contain any
specific proposals or offer any alternatives to the proposals in the MTBPS and
do not sufficiently contribute in assisting the Committee to consider the
strengths and weaknesses of different options to deal with the current economic
and financial challenges.
Noted that most of the FFCs
proposals to NT were accepted, and that the FFC welcomes most aspects of the
2014 MTBPS, including economic forecasts; fiscal consolidation; a moderate
public sector wage bill; governments intention to intensify initiatives to
combat waste; inefficiency and corruption; proposals to increase taxes and a
deficit reduction programme.
As also noted in the Committees Budget Report, the
Committee believes that it is not sustainable for NT to keep rescuing
challenged SOEs who fail to improve their performance despite constant support.
The Committee accepts that there may be a need to sell non-strategic assets,
but is interested to know what criteria will be used to determine what
non-strategic assets are and on what the terms they will be sold.
Agrees that while there are significant global
constraints hindering South Africas economic growth over which the country has
limited control, there are also major domestic constraints that can and must be
addressed, including badly managed labour disputes, energy and transport
challenges, skills shortages and some policy uncertainties.
Noted that the current account and fiscal deficits
combined with electricity shortages and high electricity tariffs low growth
prospects are seen as key risks by investors.
Noted that National Treasury has allocated
R561.1 million for Employment Creation Facilitation.
Noted the input from the PBO that reducing the public
sector wage bill could serve to reduce domestic demand and lead to possible job
losses and reduce the prospects of economic growth.
Welcomed the governments
cost-containment proposals and stressed the need to ensure that these
contribute to the countrys economic growth, job-creation and developmental
goals; and noted, further, that the FFC supported the NTs proposals.
Supported the NTs commitment to ensuring that
fraud and corruption are more actively
and wasteful expenditure are more decisively reduced.
that governments anti-corruption task team has been investigating 169 criminal
cases involving 945 individuals. These investigations have led to 54
convictions, with R1.8 million in assets frozen and R105 million in assets
Most of the recommendations below need to be linked
to the deliberations and observations in section 4 above.
NT needs to be very clear about the criteria it uses
to define non-strategic assets and the terms of any sale of these. NT also
needs to seek to ensure that the sale of these non-strategic assets do not lead
to job-losses or other unintended consequences that undermine the countrys
economic growth and developmental goals.
The sale of non-strategic assets, however defined,
could be contested and could take time. However, some SOEs need financial
assistance more immediately. NT will have to speedily finalise measures to
separate the commercial and developmental aspects of the SOEs and other
measures to assist the SOEs in ways that contribute to improving their
financial position in the interim.
The 2015-16 Budget will have to clearly set out how
NT will realise the assumptions of the MTBPS and mitigate the risks to
implementing it. The Committee will actively engage NT on this.
The NT needs to be clearer about how government is
going to deal with the domestic constraints to growth, including badly-managed
labour disputes, electricity and transport challenges, skills shortages and
some policy uncertainties.
NT will have to, through a variety of ways, assist
provinces and municipalities to implement cost-containment proposals. The
Committee wants to be briefed on this periodically.
NT needs to more actively monitor the outcomes of the
Jobs Fund allocations, and the Committee will engage with the NT on this in the
first quarter of 2015. The Committee is keen to understand the number, nature
and quality of the jobs being created and how they link to the countrys
economic growth and developmental goals.
While the Committee recognises the need for foreign
direct investment, it believes that there is a need for greater focus on
domestic investment, and a right balance needs to be struck between domestic
and foreign investment.
NT needs to more clearly explain how government will
more actively combat corruption. The Committee will engage NT on this in the
first quarter of 2015.
If government is more effective in reducing
corruption, there will be significant savings and NT will be in a better
position to more carefully decide on tax increases.
The 2015-16 budget needs to be more clearly aligned
with the NDP and the Medium Term Strategic Framework, and the Committee will
engage with the NT on this when reviewing the budget.
view of the lack of investor and public confidence in the prospects of economic
growth NT needs to far more actively communicate its programmes and activities
through the public media and its own media and through other ways.
To better prepare to
monitor and follow-up on the above recommendations, the Committee further
As raised in the Budget Report, the Committee
needs to engage with the Public Enterprises Portfolio Committee on the
performance of SOEs and other related matters. The Committee will request the
PBO to undertake research on the financial aspects of SOEs and other related
issues, following consultations with the Public Enterprises Portfolio
Committee. A research report should be presented to the Committee in the first
quarter of 2015.
Following the input by the PBO on the
possible implications of reducing the public sector wage bill, the Committee
will request the PBO to develop a research report for consideration by the
Committee in the first quarter of 2015.
Parliament needs to look into new and more
creative ways of encouraging civil society participation in MTBPS public
hearings in future
The DA reserves its position on this
Report to be considered.
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