ATC121120: Report of the Select Committee on Finance on the Proposed Fiscal Framework, dated 20 November 2012
NCOP Finance
REPORT OF THE SELECT COMMITTEE ON FINANCE ON THE PROPOSED
FISCAL FRAMEWORK, DATED 20 NOVEMBER 2012
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
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
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,
SAs
second largest export destination.
BUSAs
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
SAs
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
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
SAs
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
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
.
Governments 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
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
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
SAs
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 countrys 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
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 governments plans.
The
4.
Committee Observations
Having considered
the 2012 MTBPS and public submissions, the Select 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
SAs
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 Select Committee
on Finance recommends that the Minister of Finance ensures the following:
5.1
The National Treasury should formulate
a better planned and coordinated approach to the issues of affordability in
decisions around administered prices and their effect on the cost of doing
business, 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 governments 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 Committees on Finance,
6.2
FFC, (2012), Financial and Fiscal Commission:
Submission on the 2012 Medium Term Budget Policy Statement,
6.3
Gordhan
, P.
(2012), Medium Term Budget Policy Statement Speech, Parliament of RSA,
6.4
National Treasury, (2012) Medium Term
Budget Policy Statement,
6.5
The
Report to be
considered.
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