2022 Revised Fiscal Framework and Revenue Proposals: National Treasury response to public submissions

Meeting report

Chairperson Carrim said the purpose of the meeting was to get a response to the written and oral submissions received from civil society organisations on the revised fiscal framework and revenue proposals. The written submission from National Treasury (NT) would be forwarded to the South African Institute of Chartered Accountants (SAICA), which was not available to attend this meeting.

MTBPS: National Treasury Response

Mr Ismail Momoniat, acting Director-General (DG), NT, said eight civil society submissions were received. All comments were consolidated and responded to. The key responses covered nine main areas. The Medium Term Budget Policy Statement (MTBPS) had dual purposes -- to lay the basis for the February budget, and to process mid-year budget adjustments dealing with immediate funding priorities until the end of the financial year. It was not easy to respond to proposals gathered in the pre-budget consultation process when aspects referred to in the submissions were unclear. Many meetings were held and questions were asked about the format of the consultation process. The NT agreed that the process was not perfect and was considering improvements. The MTBPS was drafted at a time of great uncertainty -- amidst the Ukraine-Russia conflict, the impact of the floods, global high inflation rates, and the zero Covid policy in China.

Mr Edgar Sishi, Head: Budget Office, NT, thanked the stakeholders for the submissions. The NT had engaged some stakeholders through the public participation process in the months leading up to the MTBPS. The MTBPS provided an outline of government’s medium term policy and did not include policy proposals on tax measures. Global and domestic risks have been increasing since the February 2022 budget. A balance between service delivery and economic growth was sought to sustain public finances. A revenue split of 49:51 between debt obligations and service delivery injections was introduced in 2021. Over the 2022 medium term expenditure framework (MTEF) period, 49% of windfall revenue would be used to improve the deficit while the remaining 51% would be allocated for health, education and police services. He disagreed that it was an austere budget. Some analyses did not consider the substantial once-off adjustments in terms of flood relief and additional debt service costs for the South African National Roads Agency Limited (SANRAL), Transnet and Denel.

Medium-term spending plans

Non-interest expenditure would increase by R52.4 billion in the 2023/24 budget and R58.5 billion in the 2024/25 budget. The following proposed additions over the next two years were included:

R66.9 billion for health, education and the provision of free basic services by local government and an extension of the Covid-19 social relief of distress (SRD) grant.
R8.9 billion for safety and security.
R11.3 billion for infrastructure investment, including rehabilitation of damaged municipal infrastructure and refurbishing provincial roads.

Funding for the social wage was protected, and would increase from R1.13 trillion in 2022/23 to R1.21 trillion in 2025/26.

South Africa’s structural growth problem

The projected economic growth forecast was below 2%. The low growth potential was attributed to structural challenges linked to the inability to combine capital and labour in a manner that would drive sustainable long-term growth. The NT proposes a combination of the following three elements to put the economy on a higher and more sustainable growth path:

A clear and stable macroeconomic framework to lay a foundation for a growing economy.
Rapid implementation of economic reforms to boost economic growth.
Government to play an important role in ensuring an enabling environment for economic activity.

Mr Momoniat reported that NT aimed to improve public participation and budget processes. The fate of the potential grey listing would be known by February 2023, which would coincide with the budget period. Many roadshows with investors had been held about plans to partially take over Eskom's debt. Two statements had been issued to clarify how the SANRAL debt was going to be shared. NT was working on a memorandum of understanding (MOU) with the Gauteng government in this regard.

Civil society submissions

Mr Matthew Parks, Parliamentary Coordinator, Congress of South African Trade Unions (COSATU), agreed that the country could not afford runaway debt. He disagreed with the position of the NT on the austere budget. All increases over the MTEF period were far below inflation. The focus was on reducing debt by not giving increases to public servants. The police service head count was decreasing. Similar declining headcounts had been observed in other key departments. Measures to reduce unemployment were not visible. COSATU supported interventions to deal with Transnet and Eskom debt, and was surprised that no additional support had been offered to assist METRORAIL. The lack of interventions to arrest the decline of municipalities was concerning. He had hoped that government would keep its commitment to review the fuel regime. No practical measures had been introduced to curb corruption. He expected government to do far more, because it could not be business as usual.

Mr Rashaad Amra, Economist, Public Economy Project (PEP), thanked NT for clarifying the revenue projection issue. He questioned the plausibility of the spending path outlined in the presentation. He argued that government’s inability to make decisions was impacting wage negotiations. Cabinet was divided on key issues which manifested in the decision-making process.

Ms Eunice Montso, Project Assistant, Healthy Living Alliance (HEALA), was surprised about the delay in the health promotion levy increase, considering the rising borrowing costs. Income generated from the proposed increase in the levy could be used for education and other service delivery needs. She found the NT's statement about their formal response to HEALA’s Promotion of Access to Information Act (PAIA) request for minutes of meetings with the sugar cane industry, unsatisfactory. As the HEALA liaison officer, she was expecting an e-mail, but had not received a response from NT.

Chairperson Maswanganyi asked for the matter to be dealt with offline. The Committee had not taken a position on the increase of the sugar levy.

Mr Momoniat replied that NT did not have meetings with the sugar lobby, but was aware of their concerns, which were not in line with the master plan. He undertook to trace the correspondence sent to HEALA on 26 October, and forward it to Ms Montso.

Chairperson Carrim said the Committee supported the NT proposal, but had to consider the consequences for farmers and farm workers. The matter required a trade-off, which might not be satisfactory to trade unions.

Dr Seeraj Mohamed, Deputy Director: Economics, Parliamentary Budget Office (PBO), said the responses from NT seemed to be quibbling about definitions, and were not taking the underlying issues into account. The impact of fiscal consolidation and inflation on real per capita spending rather than definitions must be considered. It was important to protect the social wage amidst the increasing unemployment situation. He noted the responses, but held the view that the questions had not been answered, which seemed to be a continuous problem over the years. He proposed that future discussions should involve experts who were able to interpret the South African economic framework based on different approaches. He argued that what was claimed to be investment seemed to be infrastructure maintenance instead. He held the view that poor people were not adequately represented or heard in the public participation processes because of the way in which it was structured. He felt that the issue of ideology and physiology required a proper debate.

Mr Elroy Paulus, Advocacy Coordinator, Budget Justice Coalition (BJC), remarked that his organisation had not received communication from Parliament, but he would regard it as a mistake. He concurred with Dr Mohamed’s comment that analysis must be done on real factors. Awareness must be enhanced to educate social movements and trade unions about the impact of the budget in terms of what the multipliers were, and what had been lost.

Discussion

Mr D Ryder (DA, Gauteng) commended the NT for the presentation. He expected that NT would return for a response to a couple of issues that had not been addressed. It had not dealt with the risks of an increased Wage Bill. He asked what the impact would be for each percentage increase. The SANRAL e-toll debacle was continuing due to a total lack of understanding of the funding model. Administration of the e-toll process had been shifted to the Gauteng government. He questioned the proposal to raise funds through consultations. NT needed to clarify if e-tolls would remain in place until an alternative resolution was found. SAICA had submitted good recommendations about a risk-based model and separating repairs and maintenance from new infrastructure spending. He cautioned the PBO to draw the line between its advisory role and advancing an ideology. The Committee would decide on the value of the input.

Mr W Aucamp (DA, Northern Cape) remarked that much had been said about the fuel levy. He argued that it was time to review the fuel levy within set time frames. Global instability has been affecting the transport experience for many South Africans. The review was important to lower the costs in terms of food prices, especially for the poor. Lowering the fuel levy should be considered an option without harming the fiscus.

Mr S Du Toit (FF+, North West) drew attention to the strategy in the 2022 MTBPS of not relying on transitionary revenue gains to fund permanent spending increases, but to use the funds to partly reduce risks and contingent liabilities. He asked if NT had considered that although the mining and agriculture sectors had performed well over the past year, they were under strain because of the situation between Russia and Ukraine. Input costs would rise significantly due to the impact of the conflict on fertiliser prices. The performance of the mining sector was declining. These factors would, in the short term, contribute to a decline in tax collection.

Chairperson Carrim received confirmation from the Committee Secretariat about the directive sent to all participating civil society organisations, and conveyed the message to the BJC representative who claimed he did not receive it.

Co-Chairperson Maswanganyi welcomed the NT presentation. The Financial and Fiscal Commission (FFC) and PBO had raised critical issues about the repo rate defending bondholders instead of assisting ordinary people. Raising the repo and interest rates was exacerbating the vulnerabilities of ordinary people because it was eroding the salaries of teachers and nurses and causing them to lose their houses and cars. He asked if raising the interest rate was in the best interest of the country or merely to defend the rand. He acknowledged the importance of the independence of the Reserve Bank, but their decisions were taken at the expense of ordinary people. It was not unreasonable for people who defaulted on their bonds to go on strike.

He wanted to understand how the state-owned entity (SOE) governance framework would stabilise the state-owned companies (SOCs), and asked the FFC to provide more clarity in this regard. He asked if the position that SOCs find themselves in was due to management or governance problems. He wanted to know what went wrong, because Transnet never had liquidity problems, and Eskom was cash flush at some stage. The FFC and PBO were critical statutory bodies with a duty to assist the Committee. He expected them to provide more detailed input that the Committee would be able to follow up on. He questioned the statement from the World Bank confirming a $497 million (about R9 billion) loan to lower greenhouse gases in South Africa. He asked why Eskom was borrowing money to fund the Just Transition while the entity was considering reducing debt at the same time. Debt was a serious problem, and should not be transferred to future generations. He was concerned about the impact of the loan on the sovereignty of the country, and sought clarity on whether the communique was a hoax.

Chairperson Carrim empathised with NT, which was taking responsibility for the budget but was not in a position to influence the actions of the departments. The issue of structural constraints and reforms was not new and there was no glimmer of hope that it would improve. Global circumstances were shaping the many choices that needed to be made. He asked how long the commodity boom would last. The country needed a fiscal policy on debt while the ANC needed a fiscal policy on growth. He agreed with the PBO on the issue of definitions. NT was not taking the issues raised by the PBO seriously.

The basic income grant (BIG) issue should be explored further, notwithstanding the limited fiscal space, the lack of economic growth, the July 2021 unrests, and the floods. The country was at risk of a social explosion if nothing was done. July 2021 was an indication of what could happen with the bleak economic prospects and the lack of jobs. The Appropriations Committee was not giving up on the idea of the BIG. He was not expecting comprehensive responses, but required pointed replies regarding what should be included in the fiscal framework. He was concerned about the credibility of Parliament, based on the few civil society organisations who came to participate in the meeting.

National Treasury's response

Mr Momoniat said the budget reflected government's choices and funding priorities. The difficulties experienced in 2008 drastically reduced the budget surplus. Mediocre economic growth further contributed to the current situation, where fiscal space was limited. Spending would not lead to more growth. The biggest problem with the budget was the capabilities of the state. The results or outcomes of money allocated to departments were mostly not at a satisfactory level -- they were poor. Demands to spend always exceeded revenue. Ideally, debt should be in line with capital spending, but not enough was allocated to infrastructure projects. Growth-enhancing funds were being allocated to social grants the state could not afford. SOEs felt entitled to an equitable share. The constraints of Transnet not working and the challenges at Eskom had a direct impact on growth and employment. Hard decisions about the SOEs needed to be made. Every rand allocated to SOEs meant R1 less for health and education. The fiscal space was limited and the deficits were high. Lessons from the situation in the United Kingdom showed that there was pressure to be more prudent at times of uncertainty.

Funding a BIG permanently would require an increase in tax revenue of up to R50 billion, equivalent to a 2% increase in value-added tax (VAT). No other tax would generate such a big amount. Many submissions with varying economic outlooks have been received on this matter. Trade-offs must be made which Cabinet needs to approve. He disagreed with the PBO that the austerity budget was just a matter of definitions. The PBO had not presented a strong enough case to make their proposed alternative an acceptable option.

He responded to the Co-Chairperson, and confirmed the validity of the World Bank statement. There were no secret loans, because it was disclosed in the budget. The World Bank loan had long been negotiated and culminated in a process that started in 2021. The Minister of Finance had referred to the two loans as part of the Just Transition process. He agreed that the cost of living was a critical issue. For this reason, the SDR grant had been extended to assist poor households, but the government could not be expected to compensate households for other difficulties. He undertook to provide a written response to the fuel levy proposal, because it required further attention.

Chairperson Carrrrim indicated that some of the input needed to be inserted in the Committee’s report. He requested the acting DG to provide the NT input by the afternoon of Sunday, 6 November.

Mr Momoniat replied that Sunday afternoon was a bit tight. It was agreed that the information would be forwarded to the Committee Secretariat by Monday morning, 7 November.

Mr Sishi said NT agreed on the social aspect of a BIG, and respected it as a political decision by government. It would take guidance from the Cabinet on the issue. However, political conversations needed to centre on trade-offs in terms of taxes that must be raised to fund the intervention and the impact thereof on the economy and investments. The reality was that 46% of citizens were receiving social grants. The NT proposal required a higher level of investments to improve growth and investments -- for example, in the agriculture and construction industries -- to create jobs. The challenge was about how the money was spent and the calibre of the officials responsible for implementing projects. The real issue was about performance and what entities were able to achieve with the allocated funds.

He acknowledged that the vacancy in the procurement office had played a role in the performance of the NT. He was pleased to announce that a procurement officer had been permanently appointed after the position had been vacant for five years. The conversations around wages were complicated, because the wage system included benefits and allowances being reviewed under the leadership of the Department of Public Service and Administration (DPSA). It had been reported that hundreds of entities, which were not government departments, were employing more than 160 000 people who did not fall under the public sector remuneration framework and bargaining system. These people were paid large salaries which sometimes exceeded the salaries of CEOs, DGs, and even the President. This matter illustrated the complexity of the system. The situation was unacceptable, and problematic aspects needed to be addressed as a matter of urgency.

Mr Chris Axelson, Chief Director: Economic Tax Analysis, NT, said the response to the fuel levy submissions required a two-fold response partly from NT and partly from the Department of Mineral Resources and Energy (DMRE). The tax component of the fuel levy needed to be reviewed, should it be reduced. Other elements of the fuel levy depended on a response from the DMRE. The regulation of 93 octane fuel was being reviewed. The durability of the commodity boom was difficult to predict. It might be sustainable as a result of global challenges.

Ms Boipuso Modise, Acting Deputy Director-General: Economic Policy, NT, said NT’s view on the commodity boom had been expressed at the time of the MTBPS, which was prior to the escalation of the situation in Ukraine. The expectation was that commodity prices would decline and input prices would decrease. NT provided a list of assumptions for further discussion.

On the appropriateness of repo rates, she replied that it was being done in terms of the Reserve Bank mandate. The concern was that it was disproportionately affecting lower-income households. The matters raised by the PBO required a response from both a technical and ideological perspective. The average growth in capital formation was illustrative and based on quarterly projections. The technical view was informed by the assessment of different drivers. Quarterly reports were published to stimulate robust engagements on the impediments to growth from an ideological viewpoint. She was keen to have further engagements with the PBO.

Mr Momoniat said the World Bank loan to Eskom was not new information. This was the second loan from the World Bank. The fiscal space must be rebuilt to address demands. He argued that amendments to the fuel levy must, at some point, be absorbed.

Follow up discussion

Mr Ryder asked if NT had oversight to monitor what Eskom was allowed to borrow.

Mr Momoniat replied that NT had to guarantee the loans included in contingent liabilities. The debt relief enabled Eskom to go to market. He undertook to provide more details in writing.

The Chairperson reminded stakeholders to submit their summaries for inclusion in the Committee’s report.

On the greylisting issue, he said the Committee had hoped to finish the Bill in the coming week and conduct public hearings the following week. However, the postponement of the matter by NT to next Thursday, 10 November, was worrying the NCOP. The Committee was ready to process the Bill, but there was no guarantee that a vote on the Bill would take place next Thursday. He pleaded with NT to expedite the matter.

Mr Momoniat said the team was working flat out, and asked to be granted one more week to finalise the Bill. 

Mr Ravesh Rajlal, Chief Director: Sectoral Oversight, National Treasury, said conditions were attached to Eskom’s debt take over, and would be restricted to managing structural challenges. He would respond in writing to the issues raised by the PBO.

Chairperson Maswangayi said he had lost connection and missed the response to the World Bank statement. He hoped that the matter had been responded to adequately. He wanted to know if Eskom was able to show results for all the bailouts it had received, and asked if the entity was in future going to rely on borrowing. The International Monetary Fund (IMF) should not be allowed to take over the country, which he suggested was happening in other countries. The opportunity must be created for the PBO and FFC to discuss issues affecting the economic trajectory of the country. The Committee must live up to the purpose for which these structures were created.

He questioned the efficacy of the Economic Restructuring and Recovery Plan (ERRP) because the economy was not recovering. Youth unemployment was rising and more people went to bed hungry under the watch of public representatives. Hungry people facing challenges of poverty and inequality could not be led. People were struggling to afford the most basic goods. He called on the Minister of Finance to report back on the decision about the fuel levy. He understood that Foskor was going to be capitalised to cover the gap in the fertiliser supply caused by the Russia – Ukraine war. The Committee often got commitments without following up on issues. The Research Teams should list and follow up on all the commitments made during this reporting period. NT responses had not been received timeously. He questioned the Socio Economic Impact Assessment System (SEIAS) issue, and asked why NT had been granted exemption from complying with the policy. The General Laws Amendment Bill impacted five other pieces of legislation. He questioned the impact it would have on other committees if the Standing Committee on Finance processed the amendments. Greylisting would worsen the economic position of the country. The Bill must comply, to avoid being rejected by the Constitutional Court. He had hoped the report could be adopted by Tuesday, 8 November, but this would not happen since NT had not provided the report to date.

The Chairperson argued that the NT had better insight into the matter and pleaded with NT officials to assist the Committee in finalising the matter.

The meeting was adjourned.