Medium Term Budget Policy Statement: Public Hearings & Response by Minster of Finance

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Meeting Summary

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Meeting report


9 November 2001

Relevant documents
Medium Term Budget Policy Statement 2001
Presentation by FFC
Presentation by the Minister of Finance (see Appendix)

The Financial and Fiscal Commission commented on the MTBPS in light of recommendation made by themselves and data used in the Intergovernmental Fiscal Review. The FFC submitted that the MTBPS was a good framework for going forward.

The Minister of Finance saw the Budget Committee as a welcome step and said that the hearings were very positive and will be factored into the 2002 budget.

Response by Financial and Fiscal Commission to MTBPS 2001
The FFC delegation consisted of Mr Josie, the acting chair, Mr Van Gass and Mr Makhinta.

Mr Josie said that the FFC measures the MTBPS against past recommendations by the FFC. A full document of the budget analysis will be released next year February. The FFC is pleased to note that government has accepted a large part of the FFC recommendations made in June, particularly in regard to local government. There is a general agreement that the formula used to determine the provincial allocation needs to be reworked and there is a working group dealing with this.

On Education he said that the FFC welcomes the increase in per capita expenditure and the commitment to non personnel expenditure. The increase ensures that the constitutional mandate is progressively realised. Some provinces have difficulty in targeting the poor and we need to ensure that all learners benefit from the increased allocation. The FFC welcomes the allocation to early childhood development.

On Social services, Mr Josie said that it is estimated that 3 000 000 beneficiaries will be on child support by 2003. He submitted that this is an underestimate. Also the foster care grant needs to be properly investigated to ensure proper financial planning in provinces.

The HIV / AIDS conditional grants are welcomed but the FFC has some reservation about including it in the equitable share.

On the revenue side the FFC welcomes the increased collection.

Mr Josie said that overall the MTBPS is a good framework.

Mr Van Gass made some general comments:
- it is anticipated that growth of expenditure is greater than inflation and this is in contrast to the past 4 years where particularly social service spending was declining.
- The tax to GDP ratio is projected to remain constant but increased room for deficit financing for municipal and provincial spheres
- Contingency reserves are available to accommodate any shock due to drastic changes in the exchange rate and the interest rate.

Mr Van Gass commented on the following:
Social Services
- there is a real increase that enables the progressive realization but there is a shift towards infrastructure in the allocation
- the provinces spending on Constitutionally Mandated Basic Services (CMBS) increases to 72% of the equitable share.
- There is an increase in conditional grants to HIV / AIDS and the early childhood development programme.

Local government
- there is a significant increase in the local equitable share and conditional grants for municipal basic services
- there is high potential to raise revenue but this is limited to metropolitan areas. Outside the metros transfers are relied on
- Personnel spending could rise disproportionately with amalgamation and function shifts. This could erode what is available for infrastructure spending but this is only a short to medium term problem

Analysis of the National Budget
The expansion of government expenditure is in excess of the growth of the economy and this is in step with international policy to stimulate the economy. There is also much more scope to use debt financing. Debt service costs are declining over the short to medium term.

As far as the vertical division of revenue is concerned, there is a relative shift to local and national government infrastructure programmes and this is in line with the Budget Council’s policy to emphasise infrastructure spending.

Analysis of Provincial Budget
The past 4 years provinces have reduced deficits and turned it into surpluses. An increase on a reliance to transfers from national government can be seen. The expenditure trends show that there is a real growth in all sectors but a relative shift to infrastructure and welfare.

Analysis of Municipal Budgets
The Metropolitan municipalities are most self sufficient. Other urban and especially rural municipalities are most reliant on the equitable share and conditional grants. There is a sharp real increase in the local equitable share and the conditional grants.

In conclusion Mr Van Gass said that that there was an initial concern about how provinces would meet the CMBS without any norms and standards. The legislation in all the provinces is an indicator for how provinces are performing and that norms and standards are needed to meet the progressive realisation of the CMBS. The decrease in litigation indicates that provinces are on the right track. Many difficulties will be addressed with the new equitable share formula.

Mr Louw (DP) said that it was submitted that ‘we are seeing real growth’. He wanted the FFC to say if the growth was sufficient, that is, be more specific. He also mentioned a point raised by IDASA that 40% of the allocation for HIV / AIDS is spent. He wanted to comment on this especially since provinces show surpluses.

Mr Masutha (ANC) said that Constitutional Court cases deal with several social delivery challenges. The challenges range from the prioritisation of the most destitute to admin barriers that stand in the way of delivery. He said that these challenges have different impacts and asked the FFC if they had done an analysis of these different impacts.

Mr Josie said that conservative growth projections are used. It is better to be conservative, we should not think that we will achieve high levels like India and China but SA is starting from a higher economic base than other developing countries. We do not have high projections but they are consistent. To overestimate would be dangerous.

On HIV / AIDS he said that it is difficult to make a proper analysis of the spending because we do not know on what exactly money is being spent. For example, expenditure could be classified as being for TB so we do not know exactly the exact nature of the spending.

Minister of Finance’s Response to Submissions on MTBPS
The Minister welcomed the Budget Committee as a new oversight role given to Parliament. He wanted to make it clear that the MTBPS is not a budget or even a mini budget but a set of views presented in the budget cycle. It is an analysis of the domestic economy and explains the fiscal framework and policy rationale. It gives a broad outline of tax policy developments, key spending priorities, division of resources between sources and intergovernmental finances, including information on conditional grants.

The Minister said that an intensive process informed the MTBPS which included discussions with Mincombud, the Budget Council and Forum, a Division of Revenue workshop and the Ministerial Committee on financing of local government. The MTBPS is the framework upon which all government spheres will craft their 2002 budget. Policy priorities are set for all spheres of government and must influence allocations for the 2002 budget.

There was a change from about 800 to 284 local governments. The demarcation process resulted in different kinds of municipalities with different fiscal strengths. This had to be dealt with in a special way. Many Ministries examined the fiscal pressures on local government in order to decide how to go forward in respect of their financing. If the local government has no revenue ability then they must be financed.

The Minister made the following observations about the inputs made to the Committee:
- Most inputs were positive and supportive of growth-orientated budget system
- There have been criticisms that government did not go far enough as some people argued for faster growth in spending and others argued for less borrowing and bigger tax cuts.
- The Minister believes that the 2002 budget will contribute towards growth that is sustainable in the long term through increased spending on infrastructure and social services and tax relief for low and middle income workers.

The Minister was confident in the economy because of our –
- Strong fiscal position that provides room for fiscal policy to be used to stimulate growth
- Strong, diversified exports that is assisted by the value of the Rand
- Downward trend in inflation that means it will not be necessary to increase interest rates or add to foreign liabilities.

The downward trend in global economies will affect SA negatively but due to the above factors the Minister remains confident in the economy. Because of the global slowdown a lower growth rate is projected. He said that the tough decisions of previous years are now bearing fruit.

On fiscal policy, the Minister said:
- the fiscal framework makes provision for strong real growth in spending, especially next year
- frameworks allows room for tax cuts to stimulate consumer spending
- growth in spending is sustainable if we limit borrowings and keep interest rates down in the long term
- public / private partnerships and regulatory reform is used to increase capital investment in the economy to create jobs
- the increase in the deficit to 2.6% if possible without compromising on long term growth.

On Tax policy, the Minister said:
- 2002 will be a year of consolidation with no major tax reforms
- tax cuts will aim to stimulate consumer demand, lower cost of employment at the lower levels and improve overall progressivity and fairness of the tax system
- In 2002 government will review retirement fund taxes, public benefit organisations and specific sectors where the tax rate is low.

On the spending framework, priority will be given to reducing poverty, inequality and vulnerability by increasing spending on health services, social grants, municipal services, infrastructure, policing, admin services and the strengthening of programmes tackling HIV / AIDS. The Government is concerned about underspending but the situation is improving because capital formation grew in real terms in the first half of 2001, roll-overs are declining and conditional grant mechanisms have changed to aid in spending.

The Minister emphasized Parliament’s important role in monitoring the spending of departments. The PFMA states that actual expenditure must be published on a monthly basis. It is important that Parliament looks at what is happening in a year and this will improve the quality of spending.

On Local Government Finances the Minster said that:
- Local Government share is growing the fastest to cater for the provision of services to those not presently catered for, to provide free basic services and to cover the cost of governance in fiscally weal municipalities.
- The turnaround of local government will be hard work, what needs to be done is to improve the level of efficiency and quality of services to the poor and the revenue owed to municipalities must be collected. In addition national fiscus has a key role to play in the redistribution of resources.
- The provincial share rises to accommodate social grants, the fight against HIV / AIDS, early childhood education and the acceleration of infrastructure spending.

In conclusion the Minister said that the inputs made to the Committee will be factored into the 2002 Budget.

Dr Rabie (NNP) commented that in certain sectors the tax rate is too low. He wanted the Minister to comment on this.

Mr Theron (DP) asked what the debt position of local governments was like.

A member asked how safe the roll-overs were.

Mr Masutha (ANC) referred to the Comprehensive Social Security report that is due to be released soon and asked if it was taken into consideration in the Budget for the next few years in order to respond to the challenges that the report will raise.

Dr Koornhof (UDM) asked why we should not increase the budget deficit especially in light of SARS always overshooting their target. This will enable us to increase capital expenditure.

One sector that needs to be looked at is banking and this will be hard work. Complex structured deals impact across the board. Government is in touch with the sector. Another sector is sporting organisations because this is big business and it must be looked at.

The Minister could not say with any degree of accuracy what is the debt position of local governments.

Roll-overs are approved by Treasury and ring fenced. If the roll-over is not for an approved budget item, the funds must go back to Treasury.

On the Comprehensive Social Security report, the Minister said that he cannot comment on something that he has not seen.

On increasing the deficit the Minister replied that the debt service costs needs to be taken into account. Government cannot simply increase debt service cost as part of what is available to spend. It is also important to consider capacity because we need spending to be aligned to policy. It is easy to increase the deficit but then we will pay for it in the future. It also makes a difference where the money is to be spent. If it is spent on infrastructure, then it is fine but if it is spent on consumables, then no benefits will be seen.

The Minister, responding to SACOB’s submission that South Africa needs institutions that are well run, said that parastatals are run like business and that Transtel and Telkom do not receive subsidies from government.

Further questions:
Mr Louw (DP) pointed out that until there is free competition, the parastatals cannot be compared to real world companies. He asked for the Minister’s comment on the glaring omission of the Department of Defence at the Joint Budget Committee hearings. He said that most ministers came forward and presented and if they were not available the deputy minters, director-generals or even the chief financial officers would stand in.

The Chair said that Defence was invited but indicated that they were not available because of short notice. She requested the Minster not to respond to the question.

A member asked if National Government will be able to sustain municipalities that are not self sufficient.

A member commented that if capital expenditure is increased and thus make it attractive for private companies to invest, will this not make municipalities self sustainable because there revenue base would grow.

A member said that it was important for departments and local governments to know what their responsibilities are when a policy statement is made by national government. He wanted comment on this.

Mr Mahlangu (ANC) asked if there is any policy on departments working together because when a school is built it needs electricity, water, roads etc. Secondly is it important for parliament to play an oversight role in respect of borrowing.

Ms Sonjica (ANC) commented that nothing was said on rural development.

Ms Thomson (ANC) asked if the government would be able to fund a basic income grant and if not what would be an immediate solution for extreme poverty.

The Minister said that a comment on the Post Office and Telkom is moot. The important focus is social service delivery. Private companies will go where the money is and the rural areas will be left behind. They have no commitment to a universal service obligation.

There has been a long standing debate with the Demarcation Board on the demarcation of the new municipalities. We now have to live with the 284 municipalities and have to ensure that money is not put where it is not necessary. Category C municipalities are hard pressed especially in the Eastern Cape.

On making it attractive for private investment the Minister said that this would be the ideal but it will take a while to get there. Also private sector will be selective about where it will want to go and most areas will still be ignored. A system is needed that enhances finance management in local government and the Public Finance Management Act can help with this.

The way new housing areas are introduced and the location of schools are the most important functions of local government but sadly they abandon these functions when there is fiscal pressure.

On borrowing, there is a number of ways that Parliament already plays an oversight role. If Parliament says that we must enlarge the deficit they are saying how much we must borrow. Treasury does present a record of all off shore borrowings to the finance committee and this is also an oversight role.

On the rural development strategy he said that what we do not want is another RDP fund. The Departments must bring together the resources in the nodal areas and there must be a proper accounting process.

On the question about the basic income grant the Minister said that he cannot comment on something he has not seen.

The Deputy Minister on rural and urban development said that there was a report to Cabinet on these issues. R120 billion was identified across the spheres for rural development. The report states that we need to enhance the effectiveness of how money is used. Co-ordination between spheres and departments is very important. More money should not be asked for. The first thing that needs to be done is improve co-ordination so that the impact of delivery is stronger. The way resources are applied must be more effective to have an impact on the lives of people. There has been a culture change in government because in the past departments had their own budget and plan.

Ms Hlangwane (ANC) said that the Dept of Public Works blames other departments while the departments say that Public Works are dragging their feet.

Ms Sonjica (ANC) said that municipalities depend on transfers. She wanted to know if government could sustain free basic services.

On the first question the Minister did not want to say too much because he did not want to bad mouth colleagues. He did say that in the Eastern Cape a construction of a road was put up for tender because Public Works took too long.

In response to the second question the Minister said that it is something government must watch closely. The formula takes into account the number of people that need assistance. The cut off is R1000 per household. COSATU had provided figures on how many people lived below the poverty line but their figures are not supported by the facts.

There were no further questions. The Chair thanked the Minister and the Deputy Minister and the meeting was closed.

2001 Medium Term Budget Policy Statement

Presentation by Minister of Finance in response to inputs to the Budget Committee


· Hearings conducted by Budget Committee is very positive development

· Budget Comm will play an important role in improving political oversight of the budget process

- Especially on the policy priorities that inform the budget

· Quality of inputs and engagement on inputs was of a high standard, bodes well for the future

Purpose of the MTBPS

· MTBPS is not the budget, nor is it a mini-budget

· It provides an opportunity to present to Parliament and South Africa

- Our analysis of domestic economy and how it impacts on our developmental challenges

- The fiscal framework and policy rationale for adjustments to fiscal policy to be tabled in

2002 Budget

- A broad outline of tax policy developments

- Key spending priorities identified by Government

- Division of resources between the spheres

- Intergovernmental finances, including information on conditional grants

Where does the MTBPS fit in?

· Cabinet led a process of discussing priorities for 2002 Budget, involving:

- Mincombud, Budget Council and Forum, Division of Revenue Workshop, Ministerial committee on financing of local government

· MTBPS is the framework upon which all governments will craft their 2002 Budget

· Policy priorities are set for all spheres in Government and must influence allocations in 2002 Budget

Intergovernmental system

· Our Constitution creates 3 distinct, yet interrelated spheres of Government

- Each with its own elected representatives

· Cooperative governance means each sphere must work together

- Influenced by national priorities, norms and standards, legislation

· National government, the 9 provinces and 284 local governments each draw up and vote on their own budget

- Based on their political choices

Budget process must respect intergovernmental system

General observations on inputs

· Most inputs were positive and supportive of growth-oriented budget statement

· There have been criticisms that we did not go far enough

- Some people argue for faster growth in spending

- Other argue for less borrowing and bigger tax cuts

· We believe that the 2002 Budget will contribute towards growth that is sustainable in the long term through:

- Strong grow in spending on infrastructure and social services

- Tax relief, mainly for low and middle-income workers

What informs our confidence of the economy

· Global slowdown will affect our prospects negatively, but we still project growth to accelerate over the period:

- Strong fiscal position provides room for fiscal policy to be used to stimulate growth

- Strong, diversified export sector performing well, partly due to competitive currency

- Inflation is on a downward trend, meaning that we will not have to hike interest rates or run up foreign liabilities as in 1998

Tough decisions of previous years are bearing fruits

On fiscal policy

· Fiscal framework makes provision for strong real growth in spending, especially next year

· Frameworks allows room for tax cuts to stimulate consumer spending

· Growth in spending is sustainable if we limit borrowings and keep interest rates down in the long term

· Use of PPPs and regulatory reform to increase capital investment in the economy to create jobs

· The increase in the deficit to 2,6% if possible without compromising on long term growth

On tax policy

· 2002 is likely to be a year of consolidation, no major tax reforms

· Tax cuts will aim to:

- Stimulate consumer demand

- Lower cost of employment, particularly at the lower levels

- Improve overall progressivity and fairness of the tax system

· During 2002, Government will review:

- Retirement fund taxes

- Public benefit organizations

  • Specific sectors where the effective rate of tax is low

On the spending framework

· Priority in 2002 budget will be given to reducing poverty, inequality and vulnerability

- Increased spending on health services, social grants, municipal services, infrastructure, policing and admin services

- strengthening of programmes tackling HIV/Aids

· Government must improve the quality of its spending

· Underspending is a problem, but the situation is improving

- In first half of 2001, Government capital formation grew in real terms

- Size of roll-overs is declining

- Conditional grant mechanisms changed to aid spending

Parliament has a key role to play in this regard

On intergovernmental finances

· Local government share grows the fastest, to cater for:

- Extension of services to those presently excluded

- Provision of free basic services

- Costs of governance in fiscally weak municipalities

· Local government turn around will take hard work

- Must improve level of efficiency and quality of services to poor

- They must collect the revenue owing to them

- National fiscus has key role to play in redistribution of resources

· Provincial share rises to accommodate:

- Social grant take-up and inflation related increases

- Programmes to fight HIV/Aids

Early childhood education

- Acceleration of infrastructure spending


· Inputs and comments made in the Budget Committee will be factored into 2002 Budget

· Need to continue with deepening of political oversight of the budget process

· The Treasury wishes this Committee well in its deliberations

· We pledge our assistance at all times to the new Committee


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