2019 Budget submissions: National Treasury response

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Finance Standing Committee

01 March 2019
Chairperson: Mr Y Carrim and Mr C De Beer (ANC)
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Meeting Summary

2019 Budget Speech

2018 MTBPS

2019 Budget: public hearings

The Standing and Select Committees on Finance met to hear responses from National Treasury on submissions received during public hearings on the 2019 Budget. COSATU gave a brief input.

National Treasury said the Budget was formulated against the backdrop of economic growth which has been subdued over the past decade. Real GDP growth was estimated at 1.5 % in 2019, down from 1.7 % in the 2018 Medium Term Budget Policy Statement (MTBPS). Growth in SA’s major trading partners (China and Europe) have been revised down, and uncertainty has increased with Brexit and global trade tensions. Debt-service costs account for an increasing share of the main budget deficit, and tax revenue was under increasing pressure. Tax-to-GDP ratio has fallen in recent years, despite substantial tax increases. Revenue was expected to underperform by R42.8 billion in 2018/19 compared with 2018 Budget estimates. This reflects both the economic slowdown and administrative weaknesses in SARS. Therefore, fiscal policy balances competing pressures to ensure sustainability.

Treasury reported that it was to reprioritise expenditure over the next three years, and that would see baseline reductions of R50.3 billion, with about half of this amount relating to compensation. These reductions are offset by provisional allocations of R75.3 billion, of which the vast majority goes towards supporting reconfiguration of Eskom (R69 billion). The contingency reserve was increased by R6 billion in 2019/20 to respond to possible requests for financial support by state-owned entities (SOEs), and would be lowered by R8 billion in the two outer years of the framework. As a result of these measures, the expenditure ceiling was revised up by R16 billion over the medium term, compared with 2018 Budget estimates. Tax measures would amount to R15 billion in 2019/20 and R10 billion in 2020/21. The majority of the R15 billion increase results from limited fiscal drag relief, and other elements include inflation-related increases in the fuel levy and a new carbon tax. On concerns about macroeconomic outlook forecasts and estimates, National Treasury’s forecasts are balanced: not overly optimistic or conservative relative to other forecasters. Credible forecasts are balanced, not optimistic or conservative. Notably, the trend of forecast errors were the same across institutions, and no single institution has the best forecast over time.

COSATU sympathised with the difficult spot that government was in. The crises of corruption, low economic growth and other factors were unprecedented. The federation was aware that government did not have a magic wand. However, itbelieved that the budget was underwhelming and could be much bolder. It said that government needed to engage labour and present clear plans on how to save SOEs. Also, COSATU acknowledged the need for government expenditure to be sustainable.  However it was worrying that government debt levels are rising at dangerous rates and lack credibility. The trade union pointed out that government has made a lot of noise about the wage bill, yet in the budget shocking figures continue to be allocated for the excessive amounts departments are spending on head offices with no justification. The government needed to learn to manage workers’ hard-earned taxes better.

Members asked if Treasury was being realistic with its forecasts. Year-on-year forecasts seem to be unrealistic and unachievable. How would a ballooning trend in spending reconcile with a declining revenue base. It appears there were no steps being taken to compensate job losses owing to the Health Promotion Levy. It was not solely Treasury’s responsibility to map the jobs, investment and economic growth path. There had to be concerted efforts across the board. Also, there cannot be endless summits without concrete implementation paths. Therefore, the Committees would recommend that the incoming Committees consider getting feedback on the ongoing summits. On the Carbon Tax, there was need to strike a compromise between the needs and interests of labour, NGOs and big business. The Committees would have to demand NEDLAC to report quarterly on whether it has implemented the commitments agreed upon in Parliament. Commitments were made and Members could not behave like irresponsible politicians by not meeting these obligations.

Meeting report

National Treasury response to public hearings on the 2019 Budget

Mr Ian Stuart, Acting DDG: Budget Office, National Treasury, said the main comments from the public hearings on the fiscal policy stance were as follows: spending limits- whether they were too austere or too lax; tax mix for growth and progressivity; and limits of higher taxation. On economic growth and revenue forecasts, submissions were on: the medium-term GDP forecasts; interventions to raise growth; and tax buoyancy. Specific tax matters traversed the following: carbon tax implementation date; impact of fuel levy on paraffin, LPS and biofuels; clarity on VAT refund figures; and policy of retrospective amendments. On budget matters, stakeholders commented on: early retirement intervention and service delivery; financial support for Eskom; doubling of the December old-age grant; and subsidisation of insurance premiums for emerging farmers.

 

The Budget was formulated against the backdrop of economic growth that has been subdued over the past decade. Real GDP growth was estimated at 1.5 % in 2019, down from 1.7 % in the 2018 Medium Term Budget Policy Statement (MTBPS). Growth in SA’s major trading partners (China and Europe) have been revised down, and uncertainty has increased with Brexit and global trade tensions. Debt-service costs account for an increasing share of the main budget deficit, and tax revenue was under increasing pressure. Tax-to-GDP ratio has fallen in recent years, despite substantial tax increases. Revenue was expected to underperform by R42.8 billion in 2018/19 compared with 2018 Budget estimates. This reflects both the economic slowdown and administrative weaknesses in SARS. Therefore, fiscal policy balances competing pressures to ensure sustainability.

Mr Duncan Pieterse, Acting DDG: Economic Policy, National Treasury, said Treasury was to reprioritise expenditure over the next three years, and that would see baseline reductions of R50.3 billion, with about half of this amount relating to compensation. These reductions are offset by provisional allocations of R75.3 billion, of which the vast majority goes towards supporting reconfiguration of Eskom (R69 billion). The contingency reserve was increased by R6 billion in 2019/20 to respond to possible requests for financial support by state-owned entities (SOEs), and would be lowered by R8 billion in the two outer years of the framework. As a result of these measures, the expenditure ceiling was revised up by R16 billion over the medium term, compared with 2018 Budget estimates. Tax measures would amount to R15 billion in 2019/20 and R10 billion in 2020/21. The majority of the R15 billion increase results from limited fiscal drag relief, and other elements include inflation-related increases in the fuel levy and a new carbon tax.

On concerns about macroeconomic outlook forecasts and estimates, National Treasury’s forecasts are balanced: not overly optimistic or conservative relative to other forecasters. Credible forecasts are balanced, not optimistic or conservative. Notably, the trend of forecast errors were the same across institutions, and no single institution has the best forecast over time.

VAT refunds and overall tax buoyancy

Mr Chris Axelson, Chief Director: Economic Tax Analysis, National Treasury, said Value-added tax (VAT) refunds were revised up by R8 billion compared to the MTBPS (over half of the R15 billion deterioration in expected revenues since MTBPS due to this revision). The VAT credit book started the year at around R30 billion, and went up to R42 billion by September, but concerted efforts to reduce credit book had brought it down to below R25 billion by mid-February. MTBPS estimated VAT credit book should be around R19 billion if all VAT refunds were paid in time. However, Budget 2019 adjusted this to R22 billion as more taxpayers are submitting returns for VAT refunds, and owing to higher level of potential fraud cases. There had been one-off additional VAT refund of R8 billion. Without the VAT refund one-off payment, tax buoyancy would have been 1.08 in 2018/19 and 1.06 in 2019/20 (before tax measures). It was however revised to 0.98 and 1.15 due to impact of VAT refunds. Buoyancy was expected to increase to 1.31 in 2019/20 from additional tax revenues of R15 billion in Budget 2019. Given large shortfalls in previous years, for personal income tax (PIT) and domestic VAT, buoyancies have reduced from 1.3 to 1.1.

Raising revenue from corporate income taxes (CIT)

Mr Axelson said raising the CIT rate may sound desirable to improve progressivity and tax capital owners more, but this objective was unlikely to be met. CIT rate is one of the aspects investors consider (in addition to political/policy certainty and others) when making investment decisions, which affect economic growth. 340 companies have taxable income of greater than R200 million and contribute 56% of total CIT revenue. With a 28% rate for the past decade, SA is a high-tax country and is becoming an outlier relative to key trading and investment partners such as the UK (19%), the Netherlands & US (21%), China (25%) and Mauritius (15%). The bigger the gap, the more incentive to shift profits out of South Africa, resulting in less CIT revenue (base erosion and profit shifting –BEPS); more than 40% of CIT revenue is generated by SA subsidiaries of foreign multinational enterprises. SA has implemented a number of proposals to counter BEPS, but needs specialised skills to enforce the proposals; legislation alone will not be effective.

Discussion

Mr De Beer appreciated the presentation from Treasury and invited follow-up inputs from stakeholders present, and questions from Members. SA should benefit from inter-trade within Africa and beyond. Also, as a cost-saving measure, local government officials should consider video conferencing rather than spending substantial amounts in travelling and subsistence.

Mr Matthew Parks, Parliamentary Coordinator, COSATU, said the trade union does sympathise with the difficult spot that government was in. The crises of corruption, low economic growth and other factors were unprecedented. The federation was aware that government has no magic wand. However, the budget was underwhelming. Government could be much bolder. Government needed to engage labour and present clear plans on how to save SOEs. Also, COSATU acknowledges the need for government expenditure to be sustainable.  However it was worrying that government debt levels are rising at dangerous rates and lack credibility. Government has made a lot of noise about the wage bill, yet in the budget shocking figures continue to be allocated for the excessive amounts departments are spending on head offices with no justification. The government needs to learn to manage workers’ hard-earned taxes better. 

Mr A Lees (DA) said surely the time had come for government to be more robust about reducing expenditure. He asked whether Treasury would agree with this. Also, it appears there were no steps being taken to compensate job losses owing to the Health Promotion Levy. In terms of the contingency reserve, how were these funds accessed? Surely there has to be some parliamentary role rather than having the Minister deciding on his own to access aforesaid funds.

Mr F Essack (DA, Mpumalanga) asked if Treasury was being realistic with its forecasts. Year-on-year forecasts seem to be unrealistic and unachievable. How would a ballooning trend in spending reconcile with a declining revenue base? Treasury had to be honest about this. He asked why Treasury was not recommending that some of the SOEs be privatised given the prevailing state of affairs.    

Mr Carrim said it was the Committees’ position that the public must be cushioned from effects of last year’s VAT increase. This position was articulated in a Committee Report. He added it was not solely Treasury’s responsibility to map the jobs, investment and economic growth path. There had to be concerted efforts across the board. Also, there cannot be endless summits without concrete implementation paths. Therefore, the Committees would recommend that the incoming Committees consider getting feedback on the ongoing summits. On the Carbon Tax, there was need to strike a compromise between the needs and interests of labour, NGOs and big business. The Committees would have to demand NEDLAC to report quarterly on whether it has implemented the commitments agreed upon in Parliament. Commitments were made and Members could not behave like irresponsible politicians by not meeting these obligations.

Mr Stuart said the balance that Treasury has been trying to strike for the last six years was to ease pressures on the expenditure side of the budget. The proposed rationalisation of the public wage bill was one initiative to realise this end. The wage bill has grown substantially and consistently for the past decade. There is no simple answer to the wage bill question and Treasury was well-aware of this. Managing the wage bill by bringing the headcount down overtime was an imperfect but effective way of reducing compensation expenditure. On the Eskom situation, there was a lot of uncertainty about how much money is required by the entity. The best estimate in terms of the balance sheet support was R23 billion amortised over 10 years. A variety of options on how to save Eskom were tabled but Treasury would opt for one that is fiscally transparent. Treasury strives to be as realistic as possible in its macroeconomic forecasts using the most recent statistics. Lastly, it is imperative to continue getting feedback on progress against set targets in respect of summits.

Mr Pieterse added that Treasury was trying to be as accurate and realistic as possible in as far as growth forecasts were concerned. The link between the budget and the President’s economic stimulus plan was highlighted in the budget review document, and the execution of these plans relies on line departments. Growth-enhancing plans are critical for growth and therefore it is important to continually get feedback on commitments made in summits. The formalisation of the issues logs was also critical. Without regular updates and reporting mechanisms, it would be difficult to realise the objectives of these summits.

Mr De Beer thanked everyone for their inputs. The Committees would consider the Report on the Fiscal Framework the following week.

The meeting was adjourned.

 

 

 

 

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