ATC121115: Report of the Standing Committee on Finance on the 2012 Medium Term Budget Policy Statement, dated 13 November 2012

NCOP Finance



1. Introduction

The Minister of Finance (the Minister) tabled the 2012 Medium Term Budget Policy Statement (MTBPS) before Parliament on 25 October 2012. In tabling the MTBPS, the Minister met his obligation under section 28 of the Public Finance Management Act 1 of 1999 (PFMA) that requires the Minister to table multi-year budget projections for revenue, expenditure and key macro-economic projections on an annual basis. In addition to that, the Minister also met his obligation under section 6(1) of the Money Bills Amendment Procedure and Related Matters Act 9 of 2009 (henceforth referred to as the Money Bills Act) that requires the Minister to submit to Parliament the MTBPS.

According to section 6(5) of the Money Bills Act, the Standing Committee on Finance and Select Committee on Finance (the Committees) must 30 days after the tabling of MTBPS report to the National Assembly (NA) and the National Council of Provinces (NCOP), respectively, on the proposed fiscal framework for the next three financial years. In line with section 6(2), the Committees report on a revised fiscal framework for the 2012/2013 financial year and the proposed fiscal framework for the following three years; and an explanation of the macro-economic and fiscal policy position, the macroeconomic projections and the assumptions underpinning the fiscal framework.

Following the tabling of the 2012 MTBPS and the engagement with the Minister, the Committees conducted public hearings 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 2013 Fiscal Framework

2.1 Economic outlook

Growth in advanced economies is expected to remain moderate in 2012 and 2013 on the back of high debt and borrowing costs; high levels of unemployment and the problems in the banking sector. The International Monetary Fund (IMF) projects global economic growth of 3.3 per cent in 2012, increasing slightly to 3.6 per cent in 2013, before strengthening further to 4.1 per cent in 2014. These forecasts assume effective policy reactions in the US and the Euro area, continued monetary accommodation and improved financial conditions. The Euro area has seen a marked decline in economic activity driven by financial difficulties while employment and output growth prospects have notably weakened in the US . This indicates continued uncertainty in the global economy. Euro debt crisis and the US “fiscal cliff” remain significant risks to the global economic outlook.

Over the medium term, the South African (SA) economy is projected to grow relatively slow, at a rate of 3 per cent in 2013, picking up slightly to 4.1 per cent only in 2015. Factors expected to contribute to an improved economic outlook include expanded infrastructure investment, activation of new electricity-generating capacity, relatively low inflation and interest rates and strong growth in the Southern African region, SA’s second largest export destination.

BUSA’s economic forecasts converge closely with those of the National Treasury, assuming both the external and internal factors. BUSA projects that after 2013, an improving global economy is likely to support stronger growth in domestic exports, while implementation of key economic infrastructure should bring faster GDP growth. The FFC expects the SA’s economy to remain vulnerable to slow global recovery and domestic factors such as the recent labour unrest. In absence of positive shocks, the Commission predicts that GDP growth is not likely to recover.

Headline Consumer Price Index (CPI) is expected to remain within the target band of between 3 and 6 per cent over the next three years, averaging 4.9 per cent in 2015. BUSA is of the view that the pressure from food prices, administered prices and fuel costs would keep Headline CPI towards the upper end of the inflation target band. The Manufacturing Circle concurs with BUSA that administered prices, particularly Eskom’s electricity costs are a cause for concern in terms of both the billing and the administrative inefficiencies. According to the Circle, Eskom increased electricity costs significantly between 2000 and 2010 while other emerging countries decreased costs. The Circle further expressed concern that higher interest rates increase the cost of capital to internationally uncompetitive levels.

Export volumes are estimated to decrease from 5.9 per cent in 2011 to 0.5 per cent in 2012. Domestic supply constraints including electricity rationing in manufacturing and disruptions to mining output have exacerbated the pressure on exports, from weaker global demand. The weaker rand has provided little support for manufacturing export growth, which remains subdued in the current economic environment. The National Treasury forecast a significant improvement in export performance, averaging 3.5 per cent in 2013, increasing to 6.5 per cent in 2015. The improvement in total export growth over the medium term assumes that mining production stabilises, external demand strengthens and trade with emerging and African economies expands. The current account deficit is projected to moderate from 5.9 per cent in 2012 to 5.5 per cent of GDP in 2015.

The FFC highlighted the importance of mining and the manufacturing sector to SA’s export sector and labour absorption. The Commission is of the view that the government should closely monitor these sectors’ performance over the medium term given that over the past decade they have been shrinking.

Economic growth is integral to job creation. 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 MTBPS expects large public investments in energy, port infrastructure, export railway lines, national and provincial roads maintenance and upgrading to help alleviate supply bottlenecks, supporting stronger growth and job creation.

Successful implementation of the National Development Plan (NDP) is also expected to address the domestic structural constraints and obstacles to faster growth. In light of the recent mining related strikes and stoppages, the Manufacturing Circle highlighted the importance of the mining industry on the manufacturing sector in terms of exports and employment. BUSA endorses widened and deepened commitment to the NDP and the vision 2030 as a vehicle to give direction and build confidence. BUSA believes that the NDP would gradually put SA in a better position to address the challenges posed by the current economic outlook.

The MTBPS identified key risks to the SA forecasts as weak global demand for domestic exports, volatile capital flows, currencies and commodity prices, global investment uncertainty and domestic factors. The latter include weak business confidence, infrastructure bottlenecks, a widening current account deficit and protracted striking activity in mining and other sectors.

2.2 Revenue outlook

MTBPS 2012 projects total consolidated government revenue of R986.1 billion in 2013/14, R1.092 trillion in 2014/15 and R1.205 trillion in 2015/16 financial year. Gross tax revenue is expected to remain subdued in 2013/14 but should improve during the third year of the MTEF period as economic conditions strengthen. Gross tax revenue forecast for the financial years 2012/13 and 2013/14 amounts to R821.401 billion and R901.392, respectively. Personal Income Tax (PIC), Value Added Tax (VAT) and Companies tax remain the main contributors to total tax revenue .

Government’s tax revenue is highly dependent on the developments in economic conditions both at a global and domestic level. In addition to bleak global economic outlook, moderate economic growth prospects and increased levels of debt in SA narrowed the fiscal space over the next three years. BUSA is concerned about alternative revenue options in an event that the economy fails to recover as projected.

BUSA agrees with NT that government need to tackle internal challenges to build a stronger economy. BUSA further 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.

2.3 Expenditure

The proposed fiscal framework makes R1.147 trillion available for spending in 2013/14, R1.238 trillion in 2013/14 and R1.139 trillion in 2015/16 financial year. 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 bulk of consolidated government expenditure in 2013/14 is allocated to Defence, public order and safety (151.7 billion), Education and related functions (R234 billion), Social protection (R135.6 billion), Health (R132.3 billion) and local government, housing and community amenities (R132.5 billion).

The proposed spending 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 currently in progress.

Compensation of employees takes up the largest proportion of spending and has grown faster than other categories of spending over the past four years, a concern also shared by BUSA. Over the MTEF period, compensation of employees remains the largest budget driver, allocated R378 billion in 2013/14 financial year. Government aims to contain compensation of employees by implementing more effective controls over personnel expenditure to ensure value for money and ensuring 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. 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 Manufacturing Circle applauds the National Treasury for emphasising the importance of moderating the public sector wage bill increases to support growth and sustainable job creation in the economy.

The departments have prioritised spending and identified savings amounting to R40 billion over the next three years, to improve value for money and ensure alignment with the NDP, a move also supported by BUSA. Government will step up efforts to combat waste, inefficiency and corruption, including procurement reforms. Government would also address shortcomings in planning, procurement and contract management. The FFC, BUSA and the Manufacturing Circle echo the abovementioned sentiments. The FFC further indicated that the Public Finance Management Act (PFMA) and the Municipal Finance Management Act (MFMA) make special provisions to address these issues and that these provisions should be enforced where applicable.

2.4 Government financing and debt

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 R1.7 trillion (39.2 per cent of GDP) in 2015/16. National Treasury acknowledges that rebuilding fiscal space depends on stabilising the level of public debt. Reduction of debt-to-GDP ratio will require government to maintain a small primary surplus to revert back to the pre-recession levels.

In line with the fiscal policy objective of stabilising debt, there should be provision for subdued growth of non-interest expenditure towards the last year of the MTEF. BUSA agrees that government puts a ceiling on SA’s debt as a percentage of GDP as that is essential for investment.

Debt service costs continue to grow over the medium term, draining resources that could be spent on productive investment. 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. 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.

2.5 Budget balance

The budget made provision for total consolidated revenue of R986.1 billion in 2013/14 rising to R1.205 trillion in 2015/16. On the contrary, consolidated government expenditure is projected to amount to R1.147 trillion in 2013/14 reaching R1.238 in 2015/16. This translates into a budget deficit of 4.5 per cent in 2013/14 and as a percentage of GDP. It is expected that revenue would recover alongside economic growth and moderate expenditure increases. National Treasury remains optimistic that as the economy starts to grow in 2015/16, the budget deficit as a percentage of GDP would decline to 3.1 per cent.

Recently, government has improved its budget estimates such that outcomes correspond more closely with planned expenditure. The primary risk to the fiscal outlook remains lower than expected GDP growth that is likely to result in poor revenue outcomes. This would prompt the need for policy shifts. The contingency reserve enables government to absorb risks, but remains lower in the beginning of the proposed fiscal framework.

The recent downgrade of the country’s credit rating position increased the cost of borrowing by government, state-owned enterprises and the private sector. The risk of further sovereign rating downgrades would exacerbate the cost of borrowing. The FFC is also concerned that slowing economic growth coupled with further credit downgrading may put pressure on government to extend the “switch programme” (offsetting maturing debt with long term debt), increasing government costs of borrowing. BUSA is concerned that unless recurrent government expenditure is moderated, external shocks such as recession and increase in interest rates could push the ratio of debt to GDP to a danger limit of 50 per cent.

The FFC raised its concern that refinancing near-dated debt with longer term maturity bonds is likely to put pressure on bond yields as investors will likely seek to be compensated for increased risks associated with deteriorating economic conditions and a wide budget deficit. The Commission noted that the SA bonds are currently over-subscribed but that extending the duration of public debt combined with higher yields could result in increased costs for government in the future.

3. Conclusion

South Africa ’s fiscal stance targets medium term consolidation with moderate expenditure growth, stabilising government debt and improving outcomes and shifting the composition of spending from consumption to investment. Over the long term, government intends to restore and maintain a primary surplus and prepare a fiscal report that would assess sustainability of long term spending options and model the impact of various policy considerations including the introduction of national health insurance and proposals contained in the NDP.

The Commission acknowledges that SA should continue on the path of gradual fiscal consolidation that takes into account the components of the budget that need to be consolidated but is of the view that the pace may be too slow, thus potentially undermining the credibility of government’s plans.

The Manufacturing Circle believes that SA’s fiscal policy needs a complete overview to strengthen development through the different spheres of government. According to BUSA, the degree to which investor confidence will be reassured by the MTBPS will depend on the commitments in key fiscal variables and targets being successfully implemented in the period ahead and more policy certainty being revealed in the main budget in February 2013.

4. Committee Observations

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

4.1 The global economic outlook remains uncertain and domestic economic growth is expected to remain moderate;

4.2 Recovery in economic growth is expected to create jobs, boost revenue, and eventually reduce debt levels and budget deficits;

4.3 Narrow fiscal space available to government over the medium term, elevating the level of debt;

4.4 SA’s fiscal position remains sound and sustainable, reinforced by accommodative monetary policy;

4.5 The contingency reserves are meant to absorb risks but remain low in the first two years of the proposed fiscal framework;

4.6 The revenue forecasts depend largely on global and domestic economic developments; and

4.7 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 R1.7 trillion (39.2 per cent of GDP) in 2015/16.

5. Recommendations

Having considered the 2012 Medium Term Budget Policy Statement and conducted public hearings, the Standing Committee on Finance recommends that the Minister of Finance ensures the following:

5.1 The National Treasury should establish a multi-task team to investigate and formulate a comprehensive response on the impact and effect of administered prices particularly on the cost of doing business and affordability for the ordinary consumer, and report back to the House within 90 days of the adoption of this report by the House;

5.2 The National Treasury should finalise a policy document on guidelines for cross-border investment in order to help contain a decline in foreign direct investment flows to the Republic of South Africa by 44 per cent in the 2011/12 financial year, and report back to the House within 90 days of the adoption of this report by the House;

5.3 The National Treasury should develop and provide the House with a contingency plan in the event that macro-economic projections do not result as expected in the Proposed Fiscal Framework, and report back to the Standing Committee on Finance ;

5.4 The National Treasury should develop mechanisms to increase monitoring and to ensure value for money in terms of proper coordination and procurement processes, which will assist the containment of expenditure within the available budget, and report back to the House within 90 days of the adoption of this report by the House;

5.5 The National Treasury should report on government’s approach to managing overall employment and moderate expenditure on compensation of employees, and report back to the House within 90 days of the adoption of this report by the House;

5.6 The National Treasury should report to the House on actual spending on infrastructure by government departments and state-owned enterprises, within 90 days of the adoption of this report by the House; and

5.7 The National Treasury should facilitate development of Infrastructure Investment Plan that, in turn, should determine how it would generate levels of economic activity, within 90 days of the adoption of this report by the House.

6. References

6.1 BUSA, (2012), Business Unity South Africa: MTBPS Presentation to the Standing and Select Committee’s on Finance, Cape Town , 30 October 2012

6.2 FFC, (2012), Financial and Fiscal Commission: Submission on the 2012 Medium Term Budget Policy Statement, Cape Town , 30 October 2012

6.3 Gordhan , P. (2012), Medium Term Budget Policy Statement Speech, Parliament of RSA, Cape Town , 25 October 2012

6.4 National Treasury, (2012) Medium Term Budget Policy Statement, Pretoria : Government Printers

6.5 The Manufacturing Circle , (2012), Submission on the 2012 Medium Term Budget Policy Statement, Cape Town , 30 October 2012

Report to be considered.


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