ATC231114: Report of the Standing Committee on Finance on the 2023 Revised and Proposed Fiscal Framework, Dated 14 November 2023

Finance Standing Committee

Report of the Standing Committee on Finance on the 2023 Revised and Proposed Fiscal Framework, Dated 14 November 2023

 

The Standing Committee on Finance, having considered the revised and proposed fiscal framework referred to it, reports as follow:

 

1.INTRODUCTION AND BACKGROUND

1.1.On November 1, 2023, Mr. Enoch Godongwana, the Minister of Finance, presented the 2023 Medium-Term Budget Policy Statement (MTBPS) in Parliament, in accordance with Section 27 of the Public Finance Management Act (PFMA), Act No. 1 of 1999, and Section 7 (1) of the Money Bills Amendment Procedure and Related Matters Act (Money Bills Act), Act No. 9 of 2009.

1.2.The Minister, along with Dr. Duncan Pieterse, the Director-General of National Treasury (NT), and senior officials from the NT and the South African Revenue Services (SARS), briefed a joint session of the finance and appropriation committees on November 2.

1.3.Subsequently, on November 7, the Committees received input from the Parliamentary Budget Office (PBO) and the Financial and Fiscal Commission (FFC) following the Budget tabling.

1.4.The Committees held public hearings on 8 November and received oral submissions from the Congress of South African Trade Unions (COSATU), Institute for Economic Justice (IEJ), Public Economy Project (PEP), Western Cape Commissioner for Children, Coalition on Debt Justice, Alternative Information and Development Centre (AIDC), Johannesburg Institute for Advanced Study (JIAS), and South African Breweries (SAB).

1.5.NT and SARS responded to the issues raised during the public hearings and engaged with the Committee and stakeholders on 10 November 2023.

 

2.POLITICAL OVERVIEW

2.1.Minister Enoch Gondongwana, opened by noting that NT had initially outlined its revenue forecast and departmental allocations during the Budget Speech. He said that due to changes in the revenue forecast, adjustments had to be made in the allocations. To address the revenue shortfall, NT reorganized allocations, with a moderate increase in borrowings leading to a revised deficit of 4.9%, up from the initially projected 4%.

2.2.In his speech the previous day, the Minister had noted that the economic forecast, while marked by resilience in specific sectors, also highlighted pervasive risks, including power cuts, logistical bottlenecks, inflationary pressures, and a turbulent global environment.

2.3.Addressing the fiscal outlook, the Minister acknowledged the persistent trend of government spending outpacing revenue since the 2008 global financial crisis. This imbalance has translated into escalating annual budget deficits, with the government set to borrow an average of R553 billion per year over the medium term. The gravity of the situation is underscored by the projection that gross debt will surpass R6 trillion by 2025/26, reaching 77% of GDP—a figure higher than initially forecasted.

2.4.The Minister said that fiscal consolidation emerged as a paramount concern, prompting the government to contemplate spending reductions and reprioritization. The overarching goal is to avert a fiscal crisis and prevent systemic risks to the economy. However, the Minister emphasized that the escalating debt and rising debt-service costs are not issues in isolation; they are intertwined with the imperative need for robust economic growth, which has hitherto not kept pace with the escalating expenditure.

2.5.The strategy for fiscal consolidation involves a dual approach: pragmatic spending adjustments based on policy priorities and a restructuring of the state. The latter encompasses a comprehensive review of government departments, entities, and programs over the next three years. The aim is to eliminate overlapping mandates, streamline functions, and establish sustainable remuneration standards for executives. This ambitious plan is anticipated to optimize scarce resources and channel them more effectively into priority areas.

2.6.Amidst these challenges, the Minister underscored the importance of addressing limited public sector capabilities, which erode public trust and squander resources. Consequently, a commitment was made to review and reconfigure the size and structure of the state, aligning with the President's vision outlined in the 2023 State of the Nation Address.

2.7.In tandem with fiscal consolidation, the government is committed to bolstering GDP growth. Recognizing that merely reducing debt and budget deficits is insufficient, the Minister outlined a fiscal strategy prioritizing reforms to stimulate economic growth. Capital projects, excluding interest, remain a focal point for funding, with a new mechanism introduced to enhance the pace of project delivery.

2.8.A critical aspect of the government's economic strategy is the recognition that spending must align with the budget constraint to preserve the sustainability of government services. Proposed measures include spending adjustments based on policy priorities, reconfiguration and rationalization of the state, and exploration of additional measures to anchor fiscal policy and maintain confidence.

2.9.The speech also delved into the Division of Revenue, proposing an allocation of 48% of available non-interest spending to national departments, 42.1% to provinces, and 9.9% to local government over the next three years. The pivotal role of local government in service delivery was emphasized, particularly in addressing challenges related to water provision and wastewater systems.

2.10.The Minister's address extended to the complex issue of Eskom's financial woes, proposing a debt-relief arrangement that involves writing off municipal debt to Eskom over a three-year period. This relief is contingent upon municipalities complying with stringent conditions, including enforcing strict credit controls, and maintaining up-to-date payments of Eskom's monthly current account.

2.11.Looking beyond immediate fiscal concerns, the government is actively steering South Africa toward a low-carbon economy. A green growth strategy is advocated, with a focus on assessing policy conditions, diversifying industries, and collaborating with African countries to develop battery production capacity.

2.12.In the realm of logistics, the Minister acknowledged the significant challenges faced by South Africa's logistics system, including deteriorating rail performance and inefficient ports. Broad reforms, inspired by the successful electricity sector reform, are underway, guided by the National Logistics Crisis Committee. The overarching goal is to enhance efficiencies, introduce competition, and leverage private sector support.

2.13.Infrastructure investment emerged as a linchpin for economic growth, with the government seeking to mobilize private sector financing and technical expertise on a significant scale. However, challenges, such as the lack of a credible project pipeline, sustainable financing arrangements, and effective project management, were acknowledged. In response, amendments to Treasury Regulations and key municipal legislation are proposed, along with the establishment of an Infrastructure Finance and Implementation Support Agency.

2.14.The Minister's address also delved into the critical arena of procurement reform. The Public Procurement Bill was tabled, aiming to create a unified regulatory framework that enhances transparency, strengthens integrity, and promotes transformation.

2.15.The imperative of fighting crime and corruption was underscored, not merely as a safety and social concern but as a key ingredient for economic growth. Efforts are underway to address deficiencies in combating organized crime and illegal financial flows. The government is actively engaging with international bodies, including the Financial Action Task Force (FATF), to rectify identified shortcomings and bolster the fight against financial crimes.

2.16.The concluding sections of the Minister's speech addressed ongoing financial management and governance reforms, including legislative amendments in response to recommendations from various commissions, notably the Zondo Commission, Mpati Commission, and Nugent Commission.

2.17.In essence, the 2023 MTBPS expressed the government's unwavering commitment to stabilizing the economy's foundation, supporting growth, and safeguarding the social wage. The outlined strategies encompassed fiscal consolidation, structural reforms, targeted spending, and strategic investments, all aimed at steering South Africa toward a more resilient and prosperous future.

 

3.OVERVIEW OF 2023 REVISED AND PROPOSED FISCAL FRAMEWORK

Revised Economic Outlook

3.1.The South African economy has shown resilience over the past three years, rebounding from a 6.0 percent contraction in 2020 to growth rates of 4.7 percent and 1.9 percent in 2021 and 2022, respectively. However, despite this rebound, electricity constraints have continued to impede economic growth, with expectations of loadshedding persisting for the rest of the current year and gradually easing thereafter.

3.2.The Gross Domestic Product (GDP) growth forecast for 2023 has been revised down from 0.9 percent to 0.8 percent, mainly due to lower household consumption expenditure resulting from higher inflation and interest rates, as well as reduced net exports. This places South Africa's economic performance at 0.8 percent growth in 2023, which is considerably lower than the average GDP growth of 4.1 percent for the BRIC countries.

3.3.In comparison to the sub-Saharan region, where GDP growth is projected to average 3.3 percent in 2023 and 2.9 percent in Nigeria, South Africa lags behind with its 0.8 percent growth forecast. NT’s GDP growth projection aligns closely with the South African Reserve Bank's (SARB) forecast of 0.7 percent, which was an upward revision from 0.3 percent in February 2023. SARB attributes this revision to stronger-than-expected investment and sustained spending.

3.4.Looking ahead, NT anticipates an average GDP growth rate of 1.4 percent over the medium term. Persistent structural constraints, especially in energy and logistics, along with a weaker global outlook, contribute to this moderate growth expectation. Both SARB and NT project a GDP growth rate of 1.0 percent in 2024. NT emphasizes the crucial need for the swift and determined implementation of energy and logistics reforms to stimulate economic growth.

3.5.Despite progress in addressing constraints in electricity and rail, risks to the domestic outlook remain elevated. Identified risks include higher-than-anticipated inflation and high household indebtedness. These factors underscore the importance of carefully managing and navigating potential challenges to sustain economic recovery and growth in South Africa.

Table 1: Macroeconomic performance and revised projections

Real percentage growth	2022	2023	2024	2025	2026
	Actual	Estimate	Forecast
Household consumption	2,5	0,8	1,4	1,542	1,705
Gross fixed-capital formation	4,8	6,2	3,6	4,646	3,38
Real GDP growth	1,9	0,8	1,0	1,6	1,8
Consumer price index (CPI) inflation	6,9	6,0	4,9	4,6	4,5
Current account balance (% of GDP)	-0,5	-2,4	-3,0	-3,0	-3,1

Source: National Treasury, SARB and Statistics South Africa

3.6.The data provided in Table 1, coupled with the broader economic context, paints a nuanced picture of South Africa's economic trajectory and the multifaceted challenges it faces. The analysis reveals an anticipation for the inflation rate to revert to the targeted range of 3-6 percent over the 2024 medium term.

3.7.Headline Consumer Price Inflation (CPI) exceeded the target range in 2022, averaging 6.7 percent, and is projected to moderate to 6.0 percent in 2023. The SARB responded to this by implementing a cumulative increase of 475 basis points in the repurchase rate between November 2021 and May 2023. The monetary policy cycle was paused in September 2023, setting the repo rate at 8.25 percent.

3.8.SARB attributes the trajectory of South Africa’s headline inflation rate primarily to fuel and food prices. Risks to the inflation outlook include potential increases in oil prices, a weakening rand exchange rate, the avian influenza outbreak, and elevated administered price inflation for services.

3.9.The second Quarterly Labour Force Survey (QLFS) for 2023, conducted by Statistics South Africa, indicates a positive shift in the employment landscape. The number of employed persons increased from 15.6 million in the second quarter of 2022 to 16.3 million, reflecting an increase of 784,000 persons.  However, the unemployment rate remains a significant challenge, measured at 32.6 percent, representing 7.9 million persons, although it is a slight improvement from 33.9 percent a year ago.

3.10.Despite the rise in employment, the economic growth rate is deemed insufficient to effectively address poverty and unemployment challenges. NT underscores the need for accelerated GDP growth and improvements in education and skills development to achieve sustainable long-term employment growth.

3.11.Table 1's analysis delves into key macroeconomic indicators, presenting a mixed economic scenario.  Challenges in household consumption are evident, with a short-term GDP growth slowdown. Positive trends in gross fixed-capital formation suggest potential strength in investment activities, contributing to economic recovery. The decreasing CPI inflation is favourable for consumers and businesses, indicating a more controlled pricing environment. However, attention is warranted for the widening current account deficit, emphasizing the importance of addressing external trade dynamics and financing challenges for long-term economic stability.

3.12.South Africa faces a complex economic landscape marked by both opportunities and challenges. Navigating the intricacies of inflation management, labour market dynamics, and macroeconomic performance will require a multifaceted approach from policymakers, grounded in addressing structural issues and fostering sustainable growth. The uncertainties inherent in economic projections further highlight the need for adaptive strategies to steer the country towards a resilient and inclusive economic future.

Revised and Proposed Fiscal Framework

3.13.The NT remains steadfast in its commitment to achieving fiscal sustainability, fostering economic growth, and mitigating fiscal and economic risks within its medium-term fiscal policy objectives. The strategy for fiscal consolidation involves a combination of spending reductions, efficiency measures across government, and judicious implementation of moderate tax revenue measures, as outlined in the 2023 MTBPS.

Revenue projections

3.14.Table 2 delineates the anticipated trajectory of consolidated government revenue, showcasing an increase from R1.9 trillion in 2023/24 to approximately R2.3 trillion in 2026/27. The near-term revenue outlook is impacted by a decline in corporate tax collections, offset by heightened Value Added Tax (VAT) refund payments. NT underscores that the gross tax revenue estimate for 2023/24 is expected to be R56.8 billion lower than initially projected in the 2023 Budget.

3.15.This downward adjustment is attributed to various factors, including diminished corporate tax collections within the mining sector due to lower commodity prices, weakened global growth, and the adverse effects of power cuts and logistical constraints, as highlighted in the 2023 MTBPS.

Table 2: 2023 Consolidated Fiscal Framework

R billion/percentage of GDP	2022/23	2023/24	2024/25	2025/26	2026/27
	Outcome	Estimate	Medium-term estimates
Revenue	1 898,2	1 915,5	2 012,6	2 139,3	2 286,5
	28,2%	27,3%	27,0%	27,1%	27,2%
Expenditure	2 145,2	2 262,0	2 352,5	2 473,3	2 588,6
	31,9%	32,3%	31,6%	31,3%	30,8%
Budget balance	-247,0	-346,5	-339,9	-334,0	-302,0
	-3,7%	-4,9%	-4,6%	-4,2%	-3,6%
Gross loan debt	4 765,4	5 238,0	5 641,3	6 133,4	6 524,9
	70,9%	74,7%	75,8%	77,7%	77,5%

 

Source: National Treasury

 

Expenditure

3.16.Government spending is anticipated to rise from R2.145 trillion in 2022/23 to R2.588 trillion in 2026/27, growing at an average annual rate of 4.6%. While the absolute figures reflect an increase, the percentage of GDP devoted to expenditure is expected to decline from 31.9% to 30.8% over the period. This suggests a moderate fiscal consolidation effort but underscores the ongoing commitment to supporting social welfare, with 61% of non-interest spending allocated to the social wage.

Budget Balance

3.17.The budget balance is projected to improve, with the deficit narrowing from -4.9% of GDP in 2023/24 to -3.6% in 2026/27. This indicates a positive trajectory toward fiscal consolidation, although challenges persist as the country works towards achieving a more sustainable fiscal position.

Gross Loan Debt

3.18.Gross loan debt is expected to increase from 70.9% of GDP in 2022/23 to 77.5% in 2026/27. While the debt-to-GDP ratio is forecast to stabilize in 2025/26, it is at a higher level than initially projected in the 2023 Budget. This signals a challenging fiscal environment, necessitating careful management to ensure debt sustainability.

Debt Service Costs

3.19.Debt service costs are anticipated to rise significantly from R308.5 billion (4.6% of GDP) in 2022/23 to R455.9 billion (5.4% of GDP) in 2026/27. This highlights the growing impact of debt-related expenditures on the budget, surpassing spending in individual sectors. The increasing debt service costs pose challenges to funding essential services and other policy priorities.

Risks to the Fiscal Outlook

3.20.Risks include the potential for weaker-than-expected global and domestic economic growth, which could impede revenue growth and widen the budget deficit. Continued losses by municipalities and state-owned companies may result in requests for bailouts, adding strain to the fiscal framework. Additionally, higher borrowing costs due to an elevated risk premium and tighter global monetary conditions pose further challenges, as outlined in the 2023 MTBPS.

3.21.This analysis underscores the delicate balance required for fiscal sustainability, emphasizing the importance of prudent fiscal management in the face of evolving economic conditions and potential risks. The fiscal strategy aligns with NT's overarching goals of fiscal responsibility and economic support, acknowledging the need for adaptability in response to dynamic economic conditions and challenges.

 

4.INPUTS FROM CONSTITUTIONAL AND STATUTORY INSTITUTIONS

Parliamentary Budget Office

4.1.In its analysis and submissions presented to the Committee, the PBO delivered a critique of the current fiscal policy framework, underscoring its significant socio-economic and political ramifications. A central point of contention was the government's persistent failure to meet the targets outlined in the National Development Plan (NDP) and the apparent ineffectiveness of fiscal consolidation in curbing deficits and reducing debt over the past decade.

4.2.The PBO emphasized the adverse consequences of fiscal consolidation, drawing attention to analyses by Fatas and Summers (2018) and various International Monetary Fund (IMF) Working Papers. The consensus in mainstream economics, as outlined by these sources, according to the PBO, is that fiscal consolidation leads to permanent reductions in GDP and higher debt levels, a sentiment echoed by the PBO. Pursuing a budget surplus was deemed potentially detrimental to the real economy and advised against as it might strain the economy and hinder service delivery.

4.3.The PBO expressed concern over the absence of a clear growth and unemployment reduction strategy in the MTBPS. Furthermore, the credibility of the proposed fiscal policy framework was brought into question, with urgent economic problems such as energy and logistics reforms taking centre stage.

4.4.The protection of the social wage emerged as a focal point, with the PBO highlighting that, despite constituting 61% of expenditure, the social wage lacked safeguards against inflation and population growth. The presentation also criticized the limited support for economic development within the MTBPS, citing declines in real household consumption growth and insufficient private investment.

4.5.In dissecting the fiscal framework's credibility and sustainability, the PBO pointed out that, despite the goal of achieving fiscal sustainability, both debt-to-GDP ratios and budget deficits have surged. The efficacy of ‘austerity measures’, including fiscal consolidation, in promoting fiscal sustainability and economic growth was questioned. The government was urged to provide evidence that austerity measures will lead to fiscal sustainability and economic growth.

4.6.In presenting in-year amendments, the PBO detailed adjustments to the budget, including reductions in vote allocations and additions for the 2023/24 wage agreement. The division of revenue framework was scrutinized, with concerns raised about the adequacy of the increase in provincial equitable share to cover the public service wage agreement.

4.7.Challenges in revenue generation were highlighted, with a projected decrease of R56.8 billion compared to the 2023 Budget. The PBO recommended exploring measures like windfall taxes and wealth taxes and emphasizes the need to address illicit financial flows and profit shifting.

4.8.The PBO underscored the vital role of State-Owned Enterprises (SOEs) and advocated for considering them within a developmental state agenda. Concerns are raised about inadequate government investment in SOEs, citing the Eskom experience. Public Private Partnerships (PPPs) are approached cautiously due to high expenses and varying evaluations of their effectiveness.

4.9.The PBO concluded by advocating for a broader focus in fiscal policy, urging a shift towards measures that address unemployment, improve public services and infrastructure, and foster long-term economic growth.

Financial and Fiscal Commission

4.10.The FFC delivered a presentation addressing critical aspects of the fiscal landscape. A key focus was on the implications of the current fiscal policy for social and economic dynamics. The Commission underscored the need for a nuanced approach, going beyond mere mechanical calculations, and criticized the fiscal framework's failure to support the developmental role of the state and address economic inequality effectively.

4.11.A central theme in the FFC's presentation was the assessment of fiscal consolidation's impact on the country's GDP and debt levels. Drawing on research and international experiences, the Commission echoed concerns about the potential long-term negative consequences of fiscal consolidation, emphasizing the risk of a self-defeating cycle where attempts to reduce government debt led to higher debt-to-GDP ratios.

4.12.Highlighting the socio-economic challenges facing South Africa, the FFC drew attention to the persistent issue of stunting among children, emphasizing the urgent need for government intervention. The presentation expressed reservations about the credibility of the proposed fiscal policy framework, particularly in the absence of a comprehensive strategy for economic growth and unemployment reduction.

4.13.In analyzing social assistance spending as a percentage of GDP, the FFC provided a comparative perspective with other developing economies, emphasizing the necessity for higher social assistance spending in South Africa due to its unique socio-economic challenges, including high rates of unemployment and inequality.

4.14.Turning to the 2023 MTBPS, the FFC raised concerns about the limited support for economic development and the lack of a clear path to address pressing issues. The Commission challenged the macroeconomic discussion in the MTBPS, which it perceived as overlooking key elements required for sustainable economic development.

4.15.In assessing the credibility and sustainability of the fiscal framework, the FFC pointed to the persistent increase in debt-to-GDP ratios and budget deficits despite the commitment to fiscal consolidation. The Commission urged the government to provide evidence supporting the efficacy of austerity measures and emphasized the importance of a broader perspective that considers the budget's role in reducing inequality and improving people's lives.

4.16.Summarizing the in-year amendments, the FFC outlined adjustments to vote appropriations, estimates of direct charges against the National Revenue Fund, and amendments to the division of revenue framework. The presentation concluded by stressing the need for a more inclusive and growth-oriented fiscal policy that addresses the structural challenges facing the economy and fosters long-term development.

5.SUBMISSIONS BY STAKEHOLDERS

COSATU

5.1.Anticipation gripped workers and the nation as the Government stepped up to present the MTBPS, COSATU said. However, what unfolded was a disappointment for all. Instead of the bold, decisive, and progressive budget needed to uplift a faltering economy, NT delivered an underwhelming account marked by reckless cuts and subpar increases, setting the stage for a critical Committee evaluation.

5.2.COSATU expressed concern over the nation's challenges – from unemployment to crime, load shedding to dysfunctional municipalities. Its criticism centered on NT's persistent adherence to ineffective economic and fiscal policies, emphasizing the need for a drastic shift. The call to address core obstacles like affordable electricity, reliable rail, and efficient ports echoed loudly.

5.3.COSATU vehemently rejected NT's narrow focus on cutting the wage bill, branding it a lazy solution that will not address the country's crises. The federation dispelled the notion of a bloated public service, pointing to stable wage bills over a decade. Instead, they highlighted the crisis as a collapse in company tax, primarily due to the ailing capacity of entities like Transnet.

5.4.While welcoming additional allocations to critical services, COSATU decried cuts in vital sectors like education, health, and social security. Below-inflation increases to key frontline services over the Medium-Term Expenditure Framework (MTEF) raised alarm bells. The Committee is urged to scrutinize these cuts and reallocate resources strategically.

5.5.In a forward-looking stance, COSATU proposed an aggressive budget to address real economic obstacles. The call to support Eskom, intervene at Transnet and Metro Rail, stabilize municipalities, and allocate resources to SARS reflects a comprehensive strategy. Their proposals, if implemented, aim to grow the economy, reduce unemployment, and increase state revenue.

HEALA

5.6.In response to the 2023 MTBPS, HEALA underscored its commitment to food justice and equitable access to nutritious food for all South Africans. The organization expressed disappointment with the National Treasury's decision to delay the 4.5% increase of the Health Promotion Levy (HPL) until 2025.

5.7.HEALA advocated for health taxes, such as the HPL, citing their cost-effectiveness in generating government revenue, reducing long-term healthcare costs, and addressing health inequalities.

5.8.The organization highlighted the HPL's cumulative revenue of R7.9 billion from inception in 2018 to March 2021. It urged an increase in the HPL from the then-current 11% rate to the recommended 20% to enhance revenue for the National Treasury.

5.9.Stressing the rise in non-communicable diseases (NCDs) in South Africa, particularly diabetes and cardiovascular diseases, HEALA emphasized the healthcare costs associated with overweight and obesity, representing 0.7% of South Africa’s GDP. The organization suggested that an increased HPL could save R5 billion in healthcare costs over the next two decades.

5.10.HEALA argued that well-designed health taxes, like the HPL, could improve health equity, especially benefiting lower-income and young populations. The organization expressed concern about the potential reversal of positive effects due to the lack of HPL increases in recent years.

5.11.HEALA made specific demands, including the retraction of the two-year moratorium on increasing the HPL, urging an immediate increase or within the 2023/24 financial year. The organization also demanded an increase in the HPL to the recommended 20% rate, with necessary annual inflation-related increases thereafter. HEALA further urged urgent public consultations to decrease the 4g threshold and expand the HPL to include 100% fruit juices.

5.12.In conclusion, HEALA strongly advocated for the immediate implementation of the HPL increase, emphasizing its potential to generate revenue, reduce healthcare costs, and address health inequalities in South Africa. This aligned with HEALA's core principles of promoting accessible, nutritious food for all citizens.

South African Breweries

5.13.In response to the MTBPS, SAB's submission painted a landscape characterized by heightened uncertainty and diminished business confidence. Anticipating delays in employment and investment decisions, SAB aligned its observations with the NT's projection of a modest 0.8% real GDP growth in 2023, slightly below the Budget Review estimate. Factors such as increased inflation, interest rates, and diminished net exports contributed to this subdued economic outlook.

5.14.The employment forecast was somber, with expectations of 74,000 fewer individuals employed in Q2 2023 compared to Q4 2019, reflecting a post-COVID economic recovery lag. Headline inflation was projected to decelerate gradually, influenced by a weakened rand exchange rate.

5.15.Turning to fiscal policy outlined in the MTBPS, SAB acknowledged the positive impact of high commodity export prices on revenue collection. However, they underscored that South Africa's fiscal challenges were rooted in persistent low economic growth. In response, SAB advocated for a nuanced strategy, balancing fiscal consolidation with measures to stimulate economic growth.

5.16.Highlighting a significant shortfall in Corporate Income Tax revenue compared to the budget estimate, SAB emphasized the necessity of employment growth to sustain personal income tax collections. Specific excise duties collections fell below budget estimates, and SAB anticipated proposed tax measures to yield an additional R15 billion in the 2024 Budget.

5.17.SAB underscored the importance of automatic stabilizers during economic fluctuations, cautioning against undue pressure on excise taxes. Noting consistent excise tax increases above inflation, negatively impacting the industry, SAB called for a measured approach.

5.18.In their recommendations, SAB urged a delicate equilibrium between fiscal consolidation and economic growth for sustained fiscal health. They advocated for excise adjustments aligned with projected inflation to mitigate adverse effects on industry growth. Considering the broader macroeconomic environment and industry dynamics, SAB suggested aligning excise taxes with projected inflation as a means to reduce uncertainty and bolster economic growth.

Western Cape Commissioner for Children

5.19.The Western Cape Commissioner for Children presented key recommendations for child-centered governance during the MTBPS 2023. They stressed the need to make children visible in government communications and proposed child-friendly, plain language methods, including drawings, stories, cartoons, infographics, and even Tik Toks to incorporate children's views.

5.20.Concerns about the intergenerational burden of government debt on children were highlighted. The potential impact of increased VAT on poor children and families was emphasized, with recommendations against VAT increases. The Commissioner shared perspectives from children, like Layla and Vimbai, who expressed worries about the increased cost of goods and services affecting struggling parents.

5.21.Children advocated for maintaining social sector spending to realize their rights and stressed the importance of education and community development. Recommendations were made to avoid real cuts to social spending that could undermine children's rights. Isabella emphasized the link between education quality and youth unemployment, while Vincent focused on improving communities for children.

5.22.The declining child protection budget was identified as a challenge, considering Non-Government Organisations (NGOs) performing child protection as government functionaries. The Commissioner recommended stopping the collapse of the child protection system, emphasizing the constitutional mandate of child protection and the growing demand.

5.23.Reconfiguring the state from a rights perspective was urged, emphasizing the need for Human Rights Impact Assessment expertise. The Commissioner highlighted that children were not directly considered in the 2023 MTBPS and recommended prioritizing the realization of child rights, using internationally recognized child rights impact assessments. The overall message was a call for child-centered governance and the protection of children's rights within the fiscal framework.

Public Economy Project

5.24.The "Grim Determination" reflections on South Africa's 2023 MTBPS provided a comprehensive analysis of the country's fiscal landscape. PEP offered insights into the deepening fiscal crisis, challenges in revenue projections, in-year adjustments, and the implications of proposed ‘austerity measures’.

5.25.PEP said that the fiscal crisis in South Africa is intensifying due to ongoing economic stagnation and higher interest rates. Core spending is on the decline to make room for the escalating debt costs. Despite a decade of austerity measures, debt stabilization remains elusive, contributing to lower aggregate demand, diminished growth, and a weakened state.

5.26.PEP noted that the 2023 February budget faced several miscalculations, including over-optimistic growth projections, misclassified windfalls, and the absence of a cost-of-living adjustment. In response to these outcomes, the government is proposing substantial changes and expenditure reductions over the medium term, essentially presenting an entirely new budget.

5.27.Corporate Income Tax (CIT) and VAT estimates have been revised downward, highlighting unforeseen challenges such as commodity price downturns. The proposed in-year adjustments, particularly driven by a wage agreement, raise constitutional questions and concerns about their impact on service delivery.

5.28.South Africa is facing unprecedented austerity measures that pose a significant threat to core government services. The proposed path of austerity, deeper and more sustained than before, raises questions about the potential deterioration of services and weakening of the state.

5.29.The implications of the compensation budget indicate substantial cuts to the workforce, with potential repercussions for education and healthcare. Real spending on basic education and healthcare is set to decrease, impacting services and transfers to non-profit organizations involved in social development.

5.30.Efficiency gains, targeted cuts, and spending reviews appear unlikely to materialize at the required scale. The government is urged to provide a clearer plan for managing austerity and its impact on service delivery. The fiscal outlook suggests a primary surplus, but a more plausible scenario implies fiscal slippage, necessitating careful management of debt service costs.

5.31.While the government's balance sheet has strengths, utilizing it to avert the fiscal crisis requires a clear growth and fiscal stabilization plan. The consequences of planned consolidation include continued fiscal tightening, particularly affecting government consumption and essential services.

Alternative Information and Development Centre

5.32.The AIDC submitted a comprehensive analysis, critically examining the 2023 MTBPS in the context of South Africa's economic challenges. As a grassroots non-governmental organization based in Cape Town, AIDC was established to support social movements and trade unions in advocating for a just transition to a wage-led, low-carbon development path.

5.33.In its submission, AIDC addresses multiple dimensions of the MTBPS, outlining key concerns and proposing alternative policy directions. The report is structured to cover an analysis of the fiscal framework and expenditure priorities, a critique of the assumed 'debt crisis,' the potential impact of austerity on economic growth, revenue-raising proposals, and the imperative to fund policy proposals addressing social and economic crises.

5.34.AIDC contended that the 2023 MTBPS continues a trajectory of harsh austerity initiated in 2019, with NT aiming to reduce spending as a percentage of GDP by 1.5% by 2025/26. They highlighted substantial budget cuts over three years, affecting critical sectors such as education, public health, and the police and courts. AIDC questioned the coexistence of objectives to promote economic growth and support vulnerable members while stabilizing public finances through expenditure containment.

5.35.A central argument in the submission challenges the notion of an imminent debt crisis, positing that South Africa is, in fact, grappling with a growth crisis and a severe social crisis rather than a debt crisis. The report questions the sustainability of debt-to-GDP ratios, pointing out that South Africa's debt levels align with global averages and suggesting that a thorough audit of debts incurred during specific periods may be necessary.

5.36.AIDC argued against austerity as a solution, citing evidence that austerity policies have historically failed to stimulate economic growth or reduce deficits and debts. The report underscores the negative impact of austerity on unemployment, incomes, and inequality. Additionally, it challenges the assumptions that drive austerity measures and suggests that such policies may lead to a full-blown debt crisis by hindering economic growth.

5.37.A critical aspect of AIDC's submission involves proposing immediate and medium-term measures to raise revenue without resorting to austerity. These measures include reviewing tax incentives, reversing corporate income tax rate cuts, combatting illicit financial flows, implementing a progressive net wealth tax, and addressing tax evasion by high-net-worth individuals.

5.38.AIDC concluded by asserting that the proposed austerity measures are unconstitutional, emphasizing the need to explore revenue-raising alternatives before implementing budget cuts. AIDC contends that further austerity would exacerbate economic challenges, leading to increased debt-to-GDP ratios, higher unemployment, deeper inequality, and social despair. NT is called upon to reconsider its policies and engage in a discussion about the fundamental assumptions underlying economic policy.

Coalition for Debt Justice

5.39.The CDJ submission underscored the potentially adverse impact of IFI loans on the majority of South Africans. It emphasized concerns about unsustainable debt levels and the conditionalities attached, leading to austerity measures. CDJ views addressing these issues as a moral imperative, considering the potential consequences such as increased poverty, job loss, and heightened inequality.

5.40.CDJ stated that in 2022, IFIs extended R141 billion (US$ 8.8 billion) for Covid-19 response, constituting 3.5% of government debt and 8.5% of tax revenue. The growing foreign borrowing by the government raises serious concerns about the sustainability of such financing and its impact on South Africa's policy space and development trajectory. CDJ recognized that IFI lending can be beneficial if characterized by highly concessional terms, low interest rates, long maturities, and devoid of policy conditionality. However, it identifies issues in current borrowing practices and parliamentary oversight.

5.41.Recommendations include enhanced oversight mechanisms, legislative reforms, and safeguards against regressive macroeconomic policies. CDJ urged preventing IFI loans from undermining human rights, democracy, and sovereignty. Highlighting the legal and economic imperative for human rights to guide economic reform programs, the CDJ called for comprehensive human rights impact assessments before signing IFI loan agreements. It advocated for transparent debt sustainability analyses presented to Parliament and the South African Human Rights Commission.

5.42.CDJ emphasized the need for sovereign, democratic decision-making in economic policy and increased transparency in loan agreements. It recommends public disclosure of agreements and an end to economic policy conditionality. CDJ criticized weak gender policies in IFI lending, leading to unequal treatment of men and women. It proposes the establishment of a joint committee to enforce gender budgeting aligned with South Africa's gender mainstreaming policy.

5.43.It also condemned the lack of transparency in approving IFI loans and calls for acceptable standards of consultation, accountability, and information disclosure. Recommendations include rejecting non-transparent IFI loans and improving parliamentary funding for effective oversight. Until concerns are adequately addressed, the CDJ called for a moratorium on IFI loans denominated in foreign currency, featuring policy conditionality, or interest rates exceeding the growth rate. This submission amalgamated the perspectives of civil society and trade union organisations. It urged the Committee to address these concerns before the 2024 National Budget is tabled.

Institute for Economic Justice

5.44.The IEJ commended the 2023 MTBPS for its departure from the 'fiscal crisis' narrative, acknowledging a 'growth crisis.' However, it expresses concern about the persistent pursuit of austerity, urging a reimagining of the fiscal strategy. The IEJ emphasizes the need for a development-focused budget, advocating increased public investment in infrastructure, green energy, childcare, and industrialization to address unemployment, poverty, and inequality.

5.45.While welcoming the shift in focus to a 'growth crisis,' the IEJ criticized the 2023 MTBPS for lacking a credible growth strategy, placing the responsibility on the private sector. It argued for a more direct government role in fostering sustained growth, citing historical evidence of successful interventions. The submission highlights the 2023 MTBPS's silence on pressing socio-economic issues and recommended a development-focused budget prioritizing critical areas proven to positively impact employment and GDP growth.

5.46.Addressing South Africa's debt, the IEJ emphasized that the cost of debt, not its size, should be the central focus. It suggests measures to lower borrowing costs, including increased use of short-term debt and temporary pauses in switching maturing debt. The IEJ proposed direct government debt purchases by the SARB and requiring institutional investors to hold more government debt to alleviate high borrowing costs.

5.47.The submission criticized proposed austerity measures in the 2023 MTBPS, particularly cuts to key social services and economic expenditure. It argued that these cuts will worsen challenges in public services, disproportionately affecting women. The IEJ recommended fully absorbing the public sector wage bill into additional spending and expanding targeted spending to support economic and social gains.

5.48.The IEJ underscored the importance of the Social Relief of Distress (SRD) Grant, highlighting decreasing budget allocations and arbitrary regulations limiting beneficiaries. It recommended increasing the SRD to the Food Poverty Line, addressing implementation challenges, and pursuing additional funding sources for a Universal Basic Income Guarantee (UBIG).

5.49.To maximize available resources, the IEJ proposed revenue measures, including reducing tax breaks for high earners, addressing Illicit Financial Flows, implementing a net wealth tax, and utilizing reserves. It cautioned against outsourcing growth solely to the private sector and calls for a more equitable tax structure.

5.50.Lastly, the IEJ questioned the accountability of NT, urging evidence of the human rights and gender impacts of austerity measures. It recommended a thorough review of fiscal spending, emphasizing a transparent and evidence-based state reconfiguration.

Dr Seán Muller

5.51.This submission addressed specific concerns related to the 2023 MTBPS, focusing on the fiscal framework and revenue proposals. The submission emphasized the procedural and substantive requirements of the Money Bills Act concerning the fiscal framework. It noted the challenges posed by the bundling of proposed and revised fiscal frameworks, limiting meaningful deliberation.

5.52.The focus was on the concept of an "appropriate balance" in fiscal proposals, especially in the context of fiscal consolidation. The discussion included the challenges related to debt sustainability, fiscal consolidation measures, and the impact of revenue reduction strategies, notably the corporate tax rate reduction.

5.53.Eskom Debt Relief Amendment Bill: Advocated for transparency in interest rate determination and public scrutiny.

5.54.Renewable Energy Tax Incentives: Criticized the lack of evidence or modeling for the incentives, highlighting potential inequality increase.

 

5.55.Employment Tax Incentive (ETI): Raised concerns about the credibility of job creation claims and suggested redirecting tax revenue.

5.56.SRD Grant: Welcomed the extension but questioned the proposed amount, emphasized the need for NT justification, and cautioned against legal actions by certain civil society groups.

5.57.The submission urged detailed justifications from NT regarding proposed fiscal measures, emphasizing the need for transparency, public participation, and equitable distribution of the fiscal burden.

Budget Justice Coalition

5.58.The BJC challenged the government's austerity measures, arguing that South Africa was not in a debt crisis. It suggested that austerity had adverse socio-economic outcomes and proposed a focus on growth and employment through targeted spending in labour-intensive sectors.

5.59.The BJC critiqued the proposed austerity path, concentrating on core government services, and predicted negative implications for service provision and the state. It questioned the feasibility of the government's fiscal goals and debt projections, suggesting a more plausible fiscal outlook must consider compensation budgets, non-interest spending, and support for SOEs.

5.60.The BJC proposed realistic revenue-raising measures, including reviewing tax incentives, restoring corporate income tax rates, and implementing wealth taxes. It criticized the government's tax-to-GDP ratio and called for adjustments to enhance progressivity. The submission highlighted the potential revenue from a net wealth tax and the need for increased domestic resource mobilization.

5.61.The BJC advocated for a gendered analysis of budget allocations, emphasizing the importance of addressing barriers for women in accessing basic services. It called for the expedited institutionalization of gender-responsive budgeting and public participation in the process.

5.62.The BJC expressed concern about the lack of serious efforts in the 2023 MTBPS towards sustainable mobilization of financial resources for climate change adaptation and mitigation. It critiqued the reliance on private investment and suggested public-led alternatives for a just energy transition.

5.63.The BJC criticized the high spending on-debt servicing costs compared to essential services like education, healthcare, and social protection. It raised concerns about nominal increases that did not match inflation, affecting sectors like education, early childhood development, health, and social protection.

5.64.The BJC advocated for a universal basic income grant, emphasizing the short-term nature of the Covid-19 SRD Grant extension. It raised concerns about insufficient allocations for social development.

 

 

6.RESPONSES BY NATIONAL TREASURY TO INPUTS AND SUBMISSIONS

6.1.NT provided comprehensive responses to inputs and submissions received during public hearings and parliamentary deliberations. These responses elucidate the Treasury's stance on fiscal policy, economic growth, and the allocation of public funds.

6.2.NT emphasized its mandate to promote the national government’s fiscal policy framework, coordinate macroeconomic policy, and ensure transparency and effective financial management.

Demand-Led Growth Strategy

6.3.Rejecting a demand-led growth strategy, NT attributed South Africa's economic challenges to supply-side constraints in network industries and weak private sector investment. Expansionary fiscal policy was cautioned against due to potential negative impacts on debt levels and sovereign credit risks.

Fiscal Framework

6.4.NT explained that the fiscal framework aims to restore the health of public finances and mitigate the costs of fiscal risks on the macroeconomy.

6.5.NT explained that medium-term reforms focus on electricity, rail transport, logistics, and state functioning. A prudent fiscal stance aims to promote economic growth, support vulnerable members, stabilize public finances, and reduce risks.

6.6.The 2020 MTBPS set a target to stabilize debt by 2025/26. The 2023 MTBPS proposes measures to stay on course towards achieving the debt stabilization target, considering external factors affecting progress.

6.7.The government aims to address persistent large budget deficits since the 2008 global financial crisis, which led to one of the largest increases in government debt as a share of GDP over the past 15 years. The proposed fiscal policy includes measures to tackle rising debt levels, debt-service costs, and fiscal constraints.

6.8.A balanced fiscal approach, involving spending restraint, revenue measures, and additional borrowing, is deemed necessary to stabilize debt as a percentage of GDP and mitigate the escalation in interest costs. Tax measures to raise additional revenue and reductions in non-interest spending will be proposed in the February Budget.

6.9.The fiscal landscape faces several risks, necessitating strategic management and contingency planning. Notable risks include the prospect of weaker-than-expected economic growth, financial setbacks experienced by municipalities and state-owned companies, and the escalating costs of borrowing. These challenges, if not effectively addressed, could pose significant hurdles to the achievement of crucial national development objectives.

6.10.To mitigate these fiscal risks, a contingency reserve of R27.1 billion has been established over the medium term, providing a crucial financial buffer. Despite these proactive measures, risks outlined in the 2023 Budget have materialized. The mining sector's lower revenue, increased wage bill costs, and heightened borrowing expenses have collectively strained fiscal resources.

6.11.The impact is felt directly on the availability of funds allocated to national development objectives, hindering the optimal implementation of initiatives ranging from infrastructure investments to social welfare programs and poverty alleviation efforts.

6.12.Addressing these challenges requires a strategic response, involving prudent fiscal management, reassessment of budgetary allocations, and potentially necessary policy adjustments. Continuous monitoring and proactive measures are imperative to safeguard the fiscal health of the nation amid evolving economic conditions.

Macroeconomic Framework

6.13.NT explained that its forecasts are based on best practices, ongoing model improvement, and maintenance. It said that independent studies backed the credibility of NT's macroeconomic forecasts.

Social Welfare             

6.14.Over the MTEF period, 61% of consolidated non-interest spending is allocated to the social wage, encompassing healthcare, education, social protection, community development, and employment.

6.15.Public resources, totaling R1.2 trillion over the MTEF, are directed towards targeted poverty relief. The COVID-19 SRD grant will be extended. Various programs, including the Presidential Employment Programme (PEP), Expanded Public Works Programme (EPWP), Jobs Fund, and Youth Employment Service (YES) initiative, aim to create job opportunities.

Long-Term Economic Growth

6.16.Raising economic growth is identified as a key goal for sustaining employment, referencing the period of high growth between 2003 and 2008.

6.17.Reforms in key sectors, such as energy and transport, are deemed critical for sustained growth and economic stability. Ongoing efforts include addressing rail inefficiencies, modernization, enhancing competition, and restructuring sectors to support economic growth.

Investment in Infrastructure

6.18.Investment in infrastructure is highlighted as central to promoting economic growth and job creation. The government aims to involve the private sector in funding infrastructure and providing technical expertise, utilizing concessional borrowing, and widening the scope for concessional borrowing.

Debt Management and Financing

6.19.NT explained that the government’s gross borrowing requirement includes the budget deficit and maturing debt. The objective is to raise the required cash within strategic risk benchmarks at the lowest possible cost, leveraging concessional financing for low-interest rates from multilateral development banks.

Revenue Measures and Tax Policy

6.20.The 2023 MTBPS maintains the broad tax policy direction outlined in the 2023 Budget. Revenue measures aiming to raise an additional R15 billion will be announced in the 2024 Budget, with a focus on minimizing negative economic impacts. Stakeholder proposals, including those related to VAT, fuel taxes, corporate income tax, wealth tax, and other adjustments, will be considered for the 2024 Budget.

6.21.Stakeholders questioned assumptions underlying revenue estimates in the 2023 Budget. Estimates have been revised lower in line with macroeconomic outlook revisions and changes in tax base growth.

6.22.Proposed adjustments in the 2023 MTBPS are attributed to revenue underperformance and projected shortfalls. The adjustments meet legal requirements and align with PFMA rules. Funding has been allocated to key sectors to protect essential services, acknowledging trade-offs between salary increases and headcounts.

Wage Negotiations and Budget Alignment

6.23.NT explained that budgeting for wage increases aligns with the negotiation process, acknowledging trade-offs between salary increases and headcount growth.

Transnet

6.24.Transnet's underwhelming performance has led to financial strain, prompting broader reforms guided by the Freight Logistics Roadmap. The roadmap aims to enhance efficiencies, introduce competition, and involve private sector support. A National Logistics Crisis Committee oversees the roadmap's implementation.

Eskom

6.25.The NT is introducing interest on the Eskom Debt Relief package through the Eskom Debt Relief Amendment Bill. This aims to ensure correct loan classification and charges market-related interest. Load shedding impacts businesses and households, and NT assesses the effects using analytical tools. Eskom's generation recovery, commissioning of Kusile and Medupi units, and interventions under the Energy Action Plan are crucial for addressing energy capacity shortfalls.

Load Shedding Impact

6.26.Load shedding imposes direct and indirect costs, affecting sectors like agriculture, manufacturing, and utilities. Analytical tools are used to simulate the impact on factor productivity, investment, and potential growth. Adaptation is observed in the installation of over 4,800 MW of rooftop solar PV. The government's Energy Action Plan, including fast-tracking procurement from independent power producers, is crucial for addressing the energy crisis.

Conclusion

6.27.NT reiterated the government's commitment to a balanced fiscal stance and highlighted the ongoing efforts to address economic challenges. NT provided detailed responses to stakeholders, addressing concerns and explaining the rationale behind the fiscal decisions outlined in the 2023 MTBPS.

 

7.COMMITTEES’ OBSERVATIONS AND RECOMMENDATIONS

 

7.1.The Committee recognizes that the 2023 MTBPS is presented in the midst of very challenging economic conditions. The nation faces significant economic challenges, including electricity supply, rail network, elevated inflation rates, which increase borrowing expenses, weak demand side support to the economy, and global economic challenges. These factors among others are expected to curtail economic growth. The consequences are that these indicators are and will have a negative impact on meeting challenges faced by the nation as well as economic performance. Against this backdrop, the Committee offers the following observations and recommendations on the revised and proposed fiscal framework.

Economic Outlook

Observations

7.2.The Committee acknowledges the resilience of the South African economy over the past three years, rebounding from a 6.0 percent contraction in 2020, to 4.7 percent and 1.9 percent in 2021 and 2022 respectively, having been negatively impacted by amongst others electricity loadshedding over a protracted period of time.

7.3.The Committee notes the revised GDP growth forecast for 2023, lowered from 0.9 percent to 0.8 percent. The primary contributors to this revision include lower household consumption expenditure due to inflation and interest rate increases, and a lack of overall stimulation to the demand side of the economy as well as reduced net exports.

7.4. In comparison with the sub-Saharan region whose GDP growth is projected to be 3.3 percent, South Africa's growth forecast lags for 2023.

7.5.The Committee acknowledges persistent structural constraints, particularly in energy and logistics, contributing to the moderate average GDP growth rate of 1.4 percent projected over the medium term. Attention is drawn to the crucial need for swift implementation of energy and logistics improvements.

7.6.Observing the trajectory of inflation, the Committee notes the implementation of a cumulative increase of 475 basis points in the repurchase rate by the SARB between November 2021 and May 2023. The impacts of fuel and food prices, along with identified risks, are highlighted as factors influencing the inflation outlook and weakening the consumer purchasing power as a stimulus to the economy.

7.7.While there is a positive shift in the employment landscape, with an increase in the number of employed persons, the Committee expresses concern about the persistently high unemployment rate, currently at an official rate of 32.6 percent and 42%, when using the more comprehensive definition. Attention is drawn to the need for accelerated economic growth and improvements in education and skills development to address long-term employment challenges.

7.8.The Committee observes a mixed economic scenario highlighted by challenges in household consumption, positive trends in gross fixed-capital formation, decreasing CPI inflation, and a widening current account deficit.

Recommendations

7.9.Recognizing the impact of structural constraints on economic growth, the Committee strongly recommends the swift implementation of energy and logistics improvements, encompassing comprehensive measures to overcome challenges in these critical sectors and unlock their potential for economic development.

7.10.In expressing concern over the performance of SOEs, particularly Transnet and Eskom, the Committee recommends that NT, together with the Department of Public Enterprises, share detailed turnaround strategies for these entities before the tabling of the 2024 Budget. The Committee will confer with the Portfolio Committee on Public Enterprises for the feasibility of a joint meeting.

7.11.Given the downward revision in GDP growth attributed to lower household consumption, the Committee proposes policies to stimulate household spending as the most appropriate way of driving growth. This may involve targeted interventions to address inflation and interest rate impacts on consumer behaviour.

7.12.The Committee recommends close monitoring of inflation, particularly in relation to fuel and food prices. Mitigation strategies should be developed to address potential risks such as oil price increases, currency fluctuations, and other factors influencing the inflation outlook.

7.13.To address the persistently high unemployment rate, the Committee recommends a comprehensive approach that goes beyond short-term GDP growth. Government should also implement comprehensive economic interventions to stimulate the demand-side of the economy, focusing on infrastructure development, education, and skills training, fostering innovation, and creating a favourable business environment to attract investments. Additionally, targeted policies to support small and medium enterprises, reduce bureaucratic hurdles, and address social inequalities can contribute to job creation and sustainable economic growth.

7.14.The Committee emphasizes the importance of strategic management of macroeconomic indicators, considering the mixed economic scenario. This involves careful attention to factors influencing household consumption, gross fixed-capital formation, CPI inflation, and the current account deficit.

 

Revenue issues

Observations

7.15.The Committee acknowledges the anticipated trajectory of consolidated government revenue, which shows an increase from R1.9 trillion in 2023/24 to approximately R2.3 trillion in 2026/27. The downward adjustment of R56.8 billion in gross tax revenue for 2023/24 is noted, attributed to various factors including lower commodity prices, weakened global growth, and domestic challenges.

7.16.The Committee further notes with concern the projected decline in the tax-to-GDP ratio from 25.1% in 2022/23 to 24.7% in 2023/24. This decrease, also largely attributed to lower estimates for tax revenue, underscores the critical importance of sustainable economic growth for the recovery of this ratio. The accompanying data in Table C.8 of Annexure C of the 2023 MTBPS reveals changes in tax buoyancies, pointing to challenges in revenue generation.

7.17.The main budget revenue estimates for 2023/24 have been revised downward by R44.4 billion compared to the 2023 Budget. In contrast, National Revenue Fund receipts have been adjusted upward by R11.3 billion, driven by higher expected revaluation profits from foreign-currency transactions.

7.18.Whilst details were not provided in the MTBPS, the Committee notes proposed additional R15 billion in revenue being raised in 2024/25 financial year and will engage on this at the Budget. The sharp contraction in commodity prices is a major concern and point again to the call for resources to be put into beneficiation of commodities and not dependency on export driven revenue from raw commodities.

Recommendations

7.19.While the MTBPS does not deal with revenue proposals, the Committee recommends NT seriously consider, beyond their initial response, to various revenue proposals proposed by stakeholders during the Committee’s public hearings. NT and SARS are encouraged to explore measures that will enhance revenue diversification, reducing dependence on specific sectors vulnerable to global economic fluctuations. This could involve incentivizing diverse economic activities and industries to contribute to a more resilient revenue base.

7.20.In 2018, the VAT rate experienced its first democratic-era increase, rising from 14% to 15%. This adjustment sparked significant controversy, prompting the 5th Parliament Finance Committees from the NA and NCOP to conduct three rounds of public hearings and engage extensively with stakeholders starting from March 2018. A unanimous opposition to the VAT increase emerged from various stakeholders. In response, the Minister of Finance established a Panel of Experts to explore measures mitigating the impact of the increase, particularly on impoverished households. The Panel, after extensive consultations with the public, labour, business, and civil society, issued a report recommending the addition of more items to the zero-rated VAT exempt list.

7.21.The Committees then, expressing serious reservations about the VAT increase due to its adverse effects on the poor and lower-income households, recognized the pressing budgetary constraints and the urgent need to generate additional revenue. The Committees reluctantly accepted the increase, contingent on a review. Amendments to the Tax Administration Laws Amendment Bill, 2018, mandated the Minister of Finance to conduct a review of the VAT increase's impact on revenue collection and the poor, presenting a written report to Parliament by no later than 30 June 2021. It is on these bases that the Committee recommends that the zero-VAT-rated food basket be expanded for households.

7.22.A comprehensive review of tax incentives is essential to ensure their effectiveness in stimulating economic activity and promoting the desired behaviour. The Committee emphasizes the need for NT and SARS to conduct a thorough assessment of existing tax incentives, considering their impact on revenue collection, job creation, and overall economic growth. The review should also evaluate the alignment of tax incentives with broader policy objectives and assess whether they effectively contribute to achieving desired outcomes. Recommendations for adjustments or modifications to the existing tax incentive framework may be necessary based on the findings of this review.

 

Expenditure issues

Observations

7.23.The Committee recognizes the anticipated rise in government spending from R2.145 trillion in 2022/23 to R2.588 trillion in 2026/27, with an average annual growth rate of 4.6 percent.

7.24.The decline in the percentage of GDP devoted to expenditure, which is a concern, coupled with the commitment to allocate 61 percent of non-interest spending to the social wage.

7.25.In the current fiscal year, non-interest expenditure in the main budget is set to decrease by R3.7 billion relative to the 2023 Budget. This reduction stems from proposed cuts to baselines, declared unspent funds, projected underspending, drawdowns of the contingency reserve, and provisional allocations not assigned to votes. Allocations for the 2023/24 wage increase in labour-intensive sectors and adjustments in debt-service costs are notable factors impacting expenditure.

7.26.Debt-service costs are a growing concern, with a revision upward by R14.1 billion in 2023/24, attributed to higher interest rates, exchange rate depreciation, and a wider budget deficit. This increase in expenditure by R10.3 billion contributes to a significant rise in the main budget deficit compared to the 2023 Budget estimates.

Recommendations

7.27.The Committee re-emphasises that the risk factors of not factoring in the real costs of the public sector wage bill in the budget results in government's response to manage the 2023/24 public sector wage increase , which emphasizes the need for other departments to absorb the wage hike within their baselines. This strategy includes implementing controls on payroll systems to ensure that executive authorities operate within their budgets when creating and filling vacant posts. Factoring in real costs to the budget over the MTEF as stakeholders have on an annual basis raised, should be the preferred approach going forward.

7.28.Given the anticipated rise in government spending, the Committee recommends a vigilant approach to expenditure management, without sacrificing service delivery. It suggests implementing efficiency measures across government to ensure that allocated funds are utilized effectively, optimizing the impact of spending on social welfare and economic development. NT must take on greater responsibility to ensure the quality and performance of expenditure across departments and entities.

7.29.Regarding the reduction in the in-year expenditure attributed to proposed reductions in department baselines and declared unspent funds, the Committee calls on NT to assess the potential effects of reduced spending on services and programs. It also calls for the prioritization of critical spending, ensuring that reductions do not compromise services and commitments.

 

Budget Balance and Debt Sustainability

Observations

7.30.The projected improvement in the budget balance, with the deficit narrowing from -4.9% of GDP in 2023/24 to -3.6% in 2026/27, is observed positively by the Committee. The increasing gross loan debt, reaching 77.5% of GDP in 2026/27 requires careful management.

7.31.The Committee notes the significant rise in debt service costs from R308.5 billion in 2022/23 to R455.9 billion in 2026/27. This raises concerns about the growing impact of debt-related expenditures on the budget and call on NT to e nsure that this does not impact on funding services and policy priorities.

.

Recommendations

7.32.The Committee emphasizes the importance of continuous monitoring and proactive risk mitigation. It recommends a comprehensive risk management strategy to address potential challenges, such as weaker-than-expected economic growth, losses by municipalities and state-owned companies, and higher borrowing costs.

7.33.Acknowledging the risks outlined in the fiscal outlook, the Committee recommends maintaining adaptability in fiscal strategies. Prudent fiscal management is crucial to navigate evolving economic conditions, ensuring that the fiscal framework remains resilient in the face of uncertainties.

7.34.The Committee recommends closely monitoring the effectiveness of spending revisions and efficiency measures to ensure the envisaged debt stabilization.

7.35.The Committee advocates for a comprehensive review of debt management practices, exploring avenues to optimize borrowing costs, and implementing risk mitigation measures to ensure fiscal sustainability.

7.36.Despite existing expenditure ceilings, deficits and debt have continued to grow, leading to considerations of additional rules for fiscal sustainability. The Committee suggests a thorough review of the effectiveness of existing fiscal rules and emphasizes the need for clear, binding measures to ensure fiscal sustainability.

7.37.The Committee stresses the importance of transparent communication from the NT regarding fiscal policies and their implications. Regular updates and clear communication on the rationale behind fiscal decisions will contribute to building public understanding and confidence in the government's fiscal management.

7.38.The Committee recommends that the government uphold transparency and accountability in its financial dealings with international financial institutions such as the International Monetary Fund (IMF) and the World Bank (WB). It is imperative that the details of any funds acquired from these institutions, including the preconditions that had to be met, and how these preconditions were met, are communicated openly to the public. This transparency ensures that citizens are informed about the utilization of international funds, promoting trust and understanding in government actions and fostering a sense of shared responsibility for the nation's financial well-being.

7.39.The Committee expresses its concerns about government securing IMF and WB loans without Parliament having any say. The Committee also needs to be briefed about why loans, where necessary, are not being secured from the BRICS Bank. The Committee recommends that legislation be introduced within three years to provide for parliamentary oversight of all IMF and WB loans in South Africa by the relevant parliamentary committees. 

Fiscal Strategy and Policy

7.40.The Committee takes note of the concerns expressed by almost all stakeholders regarding the ongoing government spending cuts. While fiscal consolidation has received Cabinet approval, and was approved by Parliament, as clarified by NT in response to the concerns in the public hearings, there is a notable call for ongoing review, particularly in light of indications that such measures might have enduring adverse effects on GDP growth and debt levels. The Committee underscores the importance of continuous evaluation, considering the potential long-term implications of the fiscal consolidation strategy implemented over the past decade.

7.41.During consultations, numerous stakeholders underscored the existence of alternatives to fiscal consolidation, advocating for measures aimed at stimulating the economy. The Committee notes that NT remains opposed to these proposals in its response, asserting that South Africa's challenges are primarily driven by supply-side constraints. The Committee notes that greater discussion on perspectives is necessary.

7.42.This divergence in perspectives highlights a significant point of contention, with stakeholders advocating for alternative economic stimuli while NT maintains its focus on addressing underlying supply-side issues. The Committee has long called for greater research evidence-based dialogue on these perspectives to form a comprehensive understanding of the debate surrounding fiscal consolidation and its alternatives, given that NT claims that a demand-led growth strategy could have a potential negative impact on debt levels and sovereign credit risks.

State Reconfiguration and Spending Reviews

7.43.The Committee notes the initiation of state reconfiguration and the proposal to restructure government programs based on spending reviews. While recognizing the need for efficiency, the Committee recommends close parliamentary oversight to ensure that these reforms align with developmental goals and do not compromise critical services. As a start, the Committee requires to be briefed by NT on the outcome of its spending reviews and quality of expenditure by departments and entities assessment.

Balance of Payments and Risks

7.44.The current account deficit is expected to widen due to increased imports for renewable energy investments and higher oil prices, posing risks to the domestic growth outlook. To address the balance of payments concerns, the Committee recommends far more commitment to beneficiation, which in turn will create more jobs, strategies to boost exports, potentially through trade diversification and increased competitiveness. Mitigating risks, such as inflation and household indebtedness, should be prioritized to enhance economic stability.

Energy Reforms and Economic Impact

7.45.Eskom's debt relief, amounting to R254 billion from 2023/24 to 2025/26, is noted. As of September 30, 2023, R16 billion had been disbursed, and a task team, involving the NT, the Department of Public Enterprises, and Eskom, has been established to monitor compliance and report quarterly on Eskom's qualification for the conversion of the loan to equity.

7.46.The progress in energy reforms, particularly the upcoming projects and amendments to the Electricity Regulation Act, is also noted. The impact of these reforms on the economy is pivotal. The three projects under the Risk Mitigation Independent Power Producer Procurement Programme, with a capacity of 150 MW, are anticipated to be connected to the grid in November 2023, with further capacity of 1000 MW 2005.

7.47.While these energy reforms are promising, there's a need for a comprehensive economic impact assessment. The Committee recommends conducting a thorough analysis of the expected contribution of these energy projects to overall economic growth. This analysis should include the potential job creation, increased industrial activity (including through localisation), and the effect on the current account balance. A transparent evaluation will provide a basis for further strategic decisions in the energy sector.

7.48.The positive momentum of private sector contributions to the clean energy transition, specifically in the realm of rooftop solar capacity, is evident. Eskom's data highlights a substantial installation of 4,412 MW of rooftop solar capacity, underscoring the private sector's pivotal role in advancing renewable energy objectives. Encouraged by this advancement, the Committee suggests exploring additional strategies to stimulate private sector involvement. This includes providing regulatory support and establishing frameworks to facilitate public-private collaborations. While promoting the expansion of renewable energy, the Committee recommends that the government upholds the current generation capacity within Eskom to ensure a smooth and uninterrupted transition to renewable energy sources.

Rail and Ports Reforms

7.49.The deteriorating performance of Transnet Freight Rail poses a significant risk to the economy, as evidenced by consistently lower transportation volumes, and associated economic costs. The establishment of the National Logistics Crisis Committee is a positive step, indicating a recognition of the issue.

7.50.The collapse in Transnet Freight Rail's performance, with volumes consistently below targets since 2018, has led to missed opportunities in coal and iron ore exports, costing the economy an estimated R411 billion.

7.51.The Committee recommends a detailed examination of the economic costs incurred due to Transnet's operational failures. This should include a breakdown of the estimated R411 billion cost and its impact on the current account balance. Additionally, the ongoing reforms, such as the separation of operations and infrastructure management functions, should be closely monitored for their effectiveness. A transparent and accountable approach to these reforms will be essential for restoring confidence in the rail and ports system.

Other issues

7.52.The Committee notes significant process and financial support for a structured and systemic approach to inclusivity and promote gender equality in the country. The Committee reiterates that NT integrates a robust gender-responsive budgeting mechanism into future budgetary processes. This should involve a detailed analysis of how budgetary allocations contribute to addressing gender disparities and supporting initiatives that advance the well-being of women and other marginalized groups, including gender-sensitive fiscal policies that align with broader national development goals.

7.53.Based on the insights provided by the Western Cape Commissioner for Children during the 2023 MTBPS, the Committee recommends the adoption of child-centred governance practices. This involves incorporating innovative and accessible communication methods, such as drawings, stories, cartoons, infographics, and platforms like TikTok, to effectively engage with children and consider their perspectives in government decision-making. To address concerns about the intergenerational impact of government debt on children, the Committee recommends a thorough assessment of the potential consequences, with a specific focus on vulnerable groups. The recommendation includes exploring alternative fiscal measures to alleviate the burden on children, particularly those from economically disadvantaged backgrounds.

7.54.Furthermore, considering the Commissioner's warnings about the potential adverse effects of increased VAT on poor children and families, the Committee strongly recommends against VAT hikes. Instead, it suggests exploring alternative revenue-generation strategies that do not disproportionately affect vulnerable sector. The Committee encourages ongoing collaboration with child advocacy groups and experts to ensure that fiscal policies prioritize the well-being of children and safeguard their future.

7.55.Most of the non-interest spending is allocated to the social wage, and there are proposals to repurpose public employment programs.  The Committee requests NT to provide  detailed plans on the coordination of public employment programs.

7.56.The Committee welcomes the extension of the SRD Grant and seeks  clarification on the potential conversion of the SRD Grant into a Basic Income Grant (BIG).

7.57.Expressing concern, the Committee notes the repurposing of a significant portion of the EPWP Grant to the Presidential Employment Initiative (PEI) without evidence of programme efficiency.

7.58.Recognizing the rationale provided by the NT for the allocation of R300 million towards political party funding in the preceding year, the Committee emphasizes the importance of transparency and seeks further clarification regarding this expenditure.

7.59.The Committee welcomes the reported improvements made to remove South Africa from the FATF grey list by NT and notes the challenges that remain. However, far more needs to be done quicker. The Committee requires NT and all the relevant Departments and agencies to provide a detailed briefing on progress being made to exit the grey listing before the tabling of the Budget in 2024.

8.Conclusion

8.1.The Committee approves the 2023 revised and 2024/25-2026/7 proposed fiscal framework.

The Democratic Alliance reserves it position.

The Freedom Front Plus and the Economic Freedom Fighters reject the report.

Report to be considered.