ATC121031: Report of the Select Committee on Finance on the 2012 Revised Fiscal Framework, dated 31 October 2012

REPORT OF THE SELECT COMMITTEE ON FINANCE ON THE 2012 REVISED FISCAL FRAMEWORK, DATED 31 OCTOBER 2012

1. Introduction

In terms of section 12 (3) of the Money Bills Amendment Procedure and Related Matters Act, Act No. 9 of 2009 (the Money Bills Act), 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. Furthermore, 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.

On 25 October 2012, the Minister of Finance tabled the 2012 revised fiscal framework, as part of the 2012 Medium Term Budget Policy Statement (MTBPS) in the National Assembly of the Parliament of South Africa. Section 12 (7) of the Money Bills Act 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 for consideration and adoption.

After receiving briefing from the Minister of Finance and the National Treasury on 26 October 2012, the Standing and Select Committees on Finance jointly conducted public hearings on the revised fiscal framework and revenue proposals on 30 October 2012. These hearings were held together with identified stakeholders, the Financial and Fiscal Commission (FFC); Business Unity South Africa (BUSA); the Manufacturing Circle and Earth-life Africa Company.

2. The 2012 Revised Fiscal Framework

2.1 Economic outlook

The International Monetary Fund (IMF) revised downward the global economic growth rates from 3.8 per cent in 2011 to 3.3 per cent in 2012, with a slight increase in 2013. This is an indication of uncertainty in global economic outlook, particularly linked to the crisis in Europe and weak growth prospects in the United States . Domestically, real Gross Domestic Product (GDP) growth is expected to decline to 2.5 per cent in 2012 compared to 3.1 per cent in 2011.

Over the medium term, the South African economy is projected to grow relatively faster, at a rate of 3 per cent in 2013, picking up slightly to 4.1 per cent in 2015. The assumptions underlying these forecasts are expanding public sector investment in infrastructure, activation of new electricity-generating capacity, improving private sector confidence, relatively low inflation and interest rates and strong growth in the Southern African region, SA’s second largest export destination. The FFC sees the downward revision of economic growth figure from 2.7 per cent to 2.5 per cent in 2012 as indicative of pressures globally and internal risks. BUSA shares the realistic assessment of the economic outlook given in the Medium Term Budget Policy Statement (MTBPS) in respect of both the external and internal factors. There is also a close convergence between the National Treasury (NT) and BUSA’s economic forecasts.

The rate of unemployment increased to 24.9 per cent in 2012, however, the economy is projected to create 780 000 jobs over the medium term. The Manufacturing Circle highlighted the importance of the mining industry on the manufacturing sector in terms of exports and employment.

Headline Consumer Price Index (CPI) is expected to remain within the target band of between 3 and 6 per cent, to support economic growth. BUSA is of the view that the pressure from food prices, administered prices and fuel costs would keep the CPI inflation towards the upper end of the inflation target band.

The Manufacturing Circle strongly believes that the South African Reserve Bank (SARB) approved a conservative interest rate policy and kept interest rates constant over extended period of time. The Manufacturing Circle further expressed concern that higher interest rates increase the cost of capital to internationally uncompetitive level. Furthermore, the Manufacturing Circle is of the view that administered prices, particularly Eskom’s electricity costs are a cause for fiscal review in terms of both the billing and the administrative inefficiencies. It was indicated that Eskom increased electricity costs by more than 171 per cent between 2000 and 2010 while other emerging countries decreased costs.

2.2 Revenue

Government’s tax revenue collection is highly dependent on the developments in economic conditions both at a global and domestic level. In addition to the bleak global economic outlook, moderate economic growth prospects and increased levels of debt in SA narrowed the fiscal space over the next three years.

It is estimated that the total value of production lost in platinum and gold mining strikes and stoppages to be R10.1 billion. The impact of mining related strikes included a 0.5 per cent loss of GDP, similar to the FFC estimate; decline in total tax revenue (R4.1 billion less), export revenue (R12.5 billion lower) and employment (38 500 fewer jobs). Furthermore, economic activity in industries such as manufacturing, logistics and services is expected to decline. These impacts will be larger should the strike activity continue.

BUSA agrees with National Treasury that Government need to address internal challenges to build a stronger economy. BUSA also sees the recent labour market disputes having ripple effects on the economy and feeding into the MTBPS outlook in terms of growth, tax revenue, exchange rates, debt ratios and unemployment.

MTBPS 2012 projects total consolidated government revenue of R900.6 billion in 2012/13 (revised down from R904.8 billion in February 2012), R986.1 billion in 2013/14 (R19.8 billion less), R1.092 trillion in 2014/15 (less R26.1 billion) and R1.205 trillion (27.6 per cent of GDP) in 2015/16 financial year. The FFC raised concerns about the slower pace of fiscal consolidation given that between 2010 and 2012 MTBPS and Budgets, the budget balance as a per cent of GDP gap widened.

In 2012, gross tax revenue is expected to be R5 billion (from R826.401 billion in February 2012 to R821.401 billion during the MTBPS tabling) less than the February 2012 estimate. It still implies a robust nominal growth rate of 10.6 per cent over the previous year. This nominal growth in tax revenue was attributed to steady improvements in compliance of South African tax payers while the continued weakness in the domestic economic environment led to revised estimates. BUSA is concerned about alternative revenue options in an event that the economy fails to recover as projected.

Personal Income Tax (PIT) and Corporate Income Tax (CIT) were consequently revised down by R3.97 billion and R1.739 billion, respectively, between February 2012 and during the tabling of the MTBPS in October 2012. This was in line with lower commodity prices and mining strikes. Meanwhile Value Added Tax (VAT) and customs duties revenue were revised slightly up during the first half of 2012/13. Gross tax revenue is projected to remain muted during 2012/13 but improve during the third year of the MTEF as economic conditions strengthen. The forecast for 2013/14 financial year gross tax revenue amounts to R901.392 billion, a nominal increase of R79.991 billion from 2012/13.

2.3 Expenditure

In its efforts to achieve fiscal consolidation, Government budgeted such that expenditure was kept constant at the National Budget 2012 baseline level. Over the next three years, expenditure is expected to grow at a moderate average rate of 2.9 per cent, in real terms. This expenditure growth level would improve access to services and accelerate the pace of infrastructure investment.

The budget made provision for total revenue of R900.6 billion in 2012/13 and R986.1 billion in 2013/14. On the contrary, consolidated government expenditure is projected to amount to R1.057 trillion in 2012/13 (revised down from R1.058 trillion in February 2012 Budget) and R1.15 trillion in 2013/14. This translates into a budget deficit of 4.8 per cent in 2012/13 and 4.5 per cent in 2013/14 as a percentage of GDP. These reflect higher than projected fiscal deficits compared to February 2012, which were based on the implications of the 2008/09 recession. It is expected that revenue would recover alongside economic growth and moderate expenditure increases and reduce the budget deficit as a percentage of GDP to 3.1 per cent in 2015/16 financial years.

The primary risk to the fiscal outlook remains lower than expected GDP growth that is likely to result in poor revenue outcomes. SA’s fiscal response to the global economic crisis has been amongst the strongest in the world. Therefore, National Treasury remains optimistic that as the economic growth increases by 2015/16, the deficit would decline to 3.1 per cent.

The proposed fiscal framework of R1.057 trillion available for spending in the 2012/13 allowed Government to shift the composition of expenditure towards infrastructure investment, economic competitiveness, education and health care without compromising key social and economic programmes. Accordingly, the budget for public sector infrastructure investment is projected to be R250 billion over the MTEF, in addition to the R845 billion construction programme that is in progress. This additional budget will fund “shovel ready” infrastructure projects. The largest share of consolidated expenditure for the 2012/13 is allocated to Health (R121.7 billion) and Education (R220.0 billion). Social protection spending is projected to be R124.5 billion, local Government gets R121.7 billion while economic support functions gets R44.6 billion and R141.7 billion is budgeted for fighting crime.

The departments have prioritised spending and identified savings (R40 billion), to improve value for money and ensure alignment with the National Development Plan (NDP), a sentiment also endorsed by BUSA. This money has been moved away from non-performing programmes or programmes that are not closely aligned to department’s core mandates. These prioritised funds would be received by the police, defence, education (for infrastructure and community libraries) and roads and public transport, amongst others.

Compensation of employees takes up the largest share of spending and has grown faster than other categories of spending over the past four years, a concern also shared by BUSA. The Manufacturing Circle applauds National Treasury for emphasising the importance of moderating the public sector wage bill increases to support growth and sustainable job creation in the economy. Carry through costs of the current year’s wage settlement have been largely done through draw downs on the contingency reserves. Departments need to set specific three-year targets for personnel numbers and remuneration costs and monitor improvements in productivity and effective use of existing staff establishments.

The departments have been instructed to prepare spending plans for 2013 within the existing baselines. New activities have to be funded through savings, reprioritisation and reducing waste. Government will step up efforts to combat waste, inefficiency and corruption, including procurement reforms and implementing more effective controls over personnel expenditure. There is also a need to address shortcomings in planning, procurement and contract management. The FFC, BUSA and the Manufacturing Circle echo the abovementioned sentiments.

2.4 Government Debt Financing

National Treasury acknowledges that rebuilding fiscal space depends on stabilising the level of public debt. In line with SA’s expansionary fiscal policy stance, Government spending expanded from 28 per cent to 34 per cent of GDP following the recession in 2008/09, which added more than R1 trillion to government debt. The deficit widened by 6 per cent of GDP between 2007 and 2011.

Total national Government net loan debt stood at R1.166 trillion (35.8 per cent of GDP) in 2012/13 and it is expected to peak at R1.709 trillion (39.2 per cent of GDP) in 2015/16. BUSA is in agreement that government puts a ceiling on SA’s debt to GDP ratio as that is essential for investment. The domestic bond market will remain the primary source of debt funding. The debt issuance will be achieved by drawing on cash balances, exchanging debt maturing within the next several years and borrowing in global capital markets. The public sector borrowing requirement remains at 7.1 per cent of GDP, moderating over the medium term.

Government debt cost is projected to rise from R88.8 billion (2.7 per cent of GDP) in 2012/13 to R114.8 billion (2.6 per cent of GDP) in 2015/16. In line with the objective of stabilising debt, there should be provision for subdued growth of non-interest expenditure towards the last year of the MTEF.

Going forward, Government must maintain a primary surplus revert back to the pre-recession levels in terms of debt as a percentage of GDP. Government aims to contain compensation of employees (effective controls over personnel expenditure to ensure value for money), reduce of debt service costs and ensure that allocations are spent efficiently and effectively.

The three year agreements signed between Government and public sector trade unions provides a stable medium term basis for planning. The risk of further sovereign rating downgrades would raise the cost of borrowing. The FFC expressed its concern that slowing economic growth coupled with credit downgrading may put pressure on Government to extend the switch programme, increasing Government costs in the future.

3. Committee Observations

Having considered the 2012 MTBPS and public submissions, the Select Committee on Finance observed the following:

• The global economic outlook remains uncertain and domestic economic growth is expected to remain moderate. These factors narrowed the fiscal space available to Government over the medium term, elevating the level of debt. Nonetheless, SA’s fiscal position remains sound and sustainable, reinforced by accommodative monetary policy and will not follow a path of fiscal austerity;
• With regards to attracting Foreign Direct Investment, South Africa needs to do more in terms of resolving labour disputes. FDI flows to South Africa dropped by 44 per cent in the past year indicates a gap in investment;
• Parliamentary oversight committees and other structures need to assist in achieving value for money in spending, including efficient and effective spending on infrastructure. Procurement and SCM processes are a public concern;
• SA remained more fiscally resilient than many countries, particularly in Europe ;
• The contingency reserves are meant to provide for unforeseen circumstances, macroeconomic and policy commitments and imperatives that would need urgent financial attention;
• The revenue forecasts are premised largely on macroeconomic projections, which are also dependent on global and domestic economic developments such as mining strikes, unemployment and investment confidence. Equity and share investors around the world are risk averse, not only to SA; there is some degree of certainty in the bond market, as SA bonds are oversubscribed;
• Consumers in SA are highly indebted such that 75 per cent of their disposable income pays debt and food price inflation rose to 9 per cent. NT indicated that there is currently no fear of bubble burst with respect to these largely unsecured loans but alluded to concerns over these worrying trends;
• The budget deficit increased by 0.2 per cent higher than the February 2012 Budget;
• Recovery in economic growth is expected to create jobs, boost revenue collection, and eventually reduce debt levels and budget deficits;
• The Committee noted that National Treasury reported that Government would increase national net debt up to R1.7 trillion by 2015/16. National Treasury asserted that debt is being managed actively and some bonds were maturing currently. Growth is taking longer than expected to return to pre-recession levels. Crisis forced SA to adopt countercyclical fiscal measures as the country was in a position to do so;
• The Committee noted that Expanded Public Works Programme (EPWP) budgets increased despite municipalities spending 54 per cent of their EPWP budgets in the previous year. National Treasury indicated that there were some improvements in infrastructure spending but not at a desired level yet;
• With respect to a decline in business confidence, interaction with business seemed to be slow despite that these businesses indicated the willingness to work with government;
• Concern raised that spending on agriculture has not been increased in the revised fiscal framework, given the sector’s labour absorbing capacity and the need to create jobs; and
• The Committee observed that the National Development Plan (NDP) provides a clear progressive approach to long term development plan.

4. Recommendations

Having considered the 2012 Revised Fiscal Framework and public submissions in accordance with sections 59 and 72 of the Constitution, the Select Committee on Finance recommends that the House accepts the 2012 Revised Fiscal Framework and further recommends as follows:

· The National Treasury should develop mechanisms to increase monitoring to ensure value for money in terms of proper coordination and procurement processes, which will assist the containment of expenditure within the available budget;

· Government departments should monitor over spending on compensation of employees over time including managing of sick leave and efficient use of available staff in order to reduce personnel over time;

· The National Treasury should work together with the Public Service Commission in addressing the issue of “ghost” employees by, for example, rolling out head count project that was piloted in Limpopo Province to the rest of the country; and

· Government, through the National Treasury, should develop plans/mechanisms to monitor the departmental savings without compromising the delivery of services.

Report to be considered.