2019 Revised Fiscal Framework and Revenue Proposals: public hearings

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Finance Standing Committee

06 November 2019
Chairperson: Mr J Maswanganyi (ANC); Mr Y Carrim (ANC)
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Meeting Summary

The Finance Committees of the National Assembly and the National Council of Provinces held a joint public hearing to receive submissions on the Medium Term Budget Policy Statement (MTBPS).

The Congress of South African Trade Unions (COSATU) told the committees that it found the MTBPS “shockingly weak and inadequate". Government had failed to rise to the challenges of a 40% unemployment rate and economic growth of barely 1%. COSATU said it supported the additional financial aid given to struggling state owned enterprises (SOEs) because they provided critical public and economic goods and employment. However, bail-outs were not a suitable plan. At Eskom, there should be a comprehensive forensic audit. Those who had looted should be arrested and incompetent management should be dismissed. There should be no privatisation or retrenchments at Eskom. COSATU rejected what it termed the National Treasury’s attacks on the rights of teachers, nurses and other public servants to a living wage. It said the increase in the public service wage bill was partly the result of addressing apartheid wage gaps. A large part of the increase was also due to an “explosion” in what executives and management paid themselves.

The Budget Justice Coalition (BJC) said further reductions to the budget expenditure ceiling had exacerbated inequality and social distress, created heavier burdens for women and hurt economic growth. Government intended to make up the budget shortfall through reductions to baseline spending. Instead, government should bolster taxes through a fiscal and social stimulus, and by increasing taxes on the wealthy. While reducing debt was an acceptable goal, there was little evidence that, at approximately 55.6% of GDP in the current fiscal year, South Africa had unsustainable levels of government borrowing.

The Rural Health Advocacy Project (RHAP) said it was concerned that harsh austerity measures would exacerbate poverty and inequality and retard job creation and economic growth. Health spending could be a catalyst for inclusive growth. Government would be investing a significant amount of money in health spending to roll out the National Health Insurance. If the transition was managed well, the additional investment could be used to stimulate employment, particularly of youth and women, in rural areas. Service delivery in rural settings was often more expensive than in urban centres. RHAP advocated that departments and National Treasury should “rural-proof” budgets before they were finalised. An effective way of doing this would be to adopt a rural adjuster, that accounted for factors such as diseconomies of scale and the higher unit costs of goods and services in rural settings.

Two organisations, WoMin African Alliance and International Rivers, raised concerns that the government had made a commitment to participating in the Grand Inga Dam Project (GIDP) in the Democratic Republic of Congo (DRC) without adequate assessment of the financial implications. Government had committed to this project without there being any independent South African project appraisal and risk assessment. Parliament should ensure that a transparent and participatory project appraisal and legal and financial risk assessment was carried out. The project had the potential to significantly increase the country’s debt levels.

Members of the Pietermaritzburg Pensioners’ Forum (PPF) appeared before the committees for the fourth time to repeat their call for a substantial increase in the old age grant and a December bonus.

The Fiscal Cliff Study Group (FCSG) said the precarious state of state owned enterprises (SOEs) had moved the country closer to a “fiscal cliff” - the point at which civil service remuneration, social grant payments and debt service costs absorbed all government revenue. At Eskom, all bonus payments should be stopped immediately; there should be a moratorium on employment and Eskom board meetings should be open to the public and the media. The study group said the civil service was unaffordable. After adjusting for inflation, the average government wage had risen by 66% in the past 10 years.

The South African Institute of Chartered Accountants (SAICA) expressed concern that the government was contemplating additional tax measures in spite of significant increases in recent years in VAT, on dividends, estate duty, fuel levy and the introduction of the sugar tax and carbon tax. SAICA said South Africa’s tax to GDP ratio had increased to 29.3% against the world average of 15.4%. The corporate tax rate of 28% was high compared to South Africa’s main trading partners and other developing countries. It could not be increased without jeopardising investment. Personal income tax was also high. A major concern was the country’s dependency on a small number of taxpayers - 540 000 taxpayers were responsible for more than 50% of total income tax collected. Increasing personal taxes or wealth taxes might result in the loss of highly mobile high net worth individuals and their skills and talents. A wiser option might be to lower tax rates to stimulate the economy and increase tax revenue in that way.

Organisations representing tobacco marketers, processors and growers called for excise duties on cigarettes to be frozen at 40% for three years while the SA Revenue Service (SARS) strengthened its capacity to crack down on the illicit trade in cigarettes. The high cost of legal products encouraged smokers to buy illegal, untaxed cigarettes. It was estimated that about 12 billion of the 35 billion cigarettes smoked annually were not taxed, costing the fiscus more than R11 billion. The legal industry had shrunk by 22 percent in the past three years. Tobacco farmers were producing 15% less, leading to job losses in rural areas.
 

Meeting report

The finance committees of the National Assembly and the National Council of Provinces held a joint public hearing to receive submissions on the Medium Term Budget Policy Statement (MTBPS) from a range of interest groups. They were welcomed by Mr Carrim who invited the Congress of South Africa Trade Unions (COSATU) to make the first presentation.

COSATU submission
COSATU said it was disappointed by the MTBPS which it found “shockingly weak and inadequate". Government had failed to rise to the challenges of a 40% unemployment rate and economic growth of barely 1%. Too little had been done by government and private companies to honour agreements made at the 2018 Presidential Jobs Summit. There was no mention in the MTBPS of a national jobs creation target. However, there were some “green shoots” in the opening of the country’s first cell phone manufacturing plant and new car plants in KwaZulu-Natal, Gauteng and the Eastern Cape.

COSATU said it supported the additional financial aid given to struggling state owned enterprises (SOEs) as they provided critical public and economic goods and employment. However, bail-outs were not a suitable plan.  At Eskom, there should be a comprehensive forensic audit. Those who had looted should be arrested and incompetent management should be dismissed. There was a need for cuts in coal supply prices and tariffs charged by independent power producers. Eskom should be allowed to produce renewable energy. There should be a clampdown on payment defaulters. There should be no privatisation or retrenchments at Eskom and there should be a “just transition” for workers and communities in the coal sector whose livelihoods were threatened by alternative energy sources.

COSATU rejected what it termed the National Treasury’s attacks on the rights of teachers, nurses and other public servants to a living wage. The increase in the public service wage bill was partly the result of addressing apartheid wage gaps. A large part of the increase was also due to an “explosion” in what executives and management paid themselves. In 1994, when there were 34 million South Africans, there were 1 million public servants. In 2019, with 57 million citizens, there were 1.1 million public servants and 128 000 vacancies. COSATU proposed that bloated management structures be reduced, that fragmented departments be consolidated, and that staff be deployed from bloated departments to those departments and municipalities where there were shortages.

On government expenditure, COSATU said 10% of the budget was lost to corruption and wasteful expenditure. There was underspending of R50 billion on infrastructure and there was “bling expenditure” on departmental head offices. COSATU called for the reprioritisation of productive expenditure. Looters should be prosecuted and stolen funds should be recovered.

COSATU said government could significantly increase revenue by a massive investment in the customs capacity of the SA Revenue Service (SARS). Currently only 5% of imports were inspected. Companies should be held accountable for the tax breaks and incentives they received for job creation. There should be increased income tax on those earning more R1.5 million, as well as increases in company taxes and wealth taxes.

Budget Justice Coalition (BJC) submission
The Budget Justice Coalition, representing nine non-governmental organisations, presented an extensive analysis of the impact of fiscal austerity measures on public services. It concluded that further reductions to the expenditure ceiling had exacerbated inequality and social distress, created heavier burdens for women and hurt economic growth.

People on low incomes relied on public services the most and paid a greater share of their income in VAT and transport costs. The economy needed stimulus, not austerity. Government intended to make up the budget shortfall through reductions to baseline spending. Instead, government should bolster taxes through a fiscal and social stimulus, and by increasing taxes on the wealthy.

While reducing debt was an acceptable goal, there was little evidence that, at approximately 55.6% of GDP in the current fiscal year, South Africa had unsustainable levels of government borrowing. There was also much evidence that debt reduction through austerity did massive economic harm.

The Budget Justice Coalition believed that, in dealing with the public sector wage bill, frontline services must be protected and advanced. Wage structures should be examined to see where the wage bill was spent. It was not about the size of the wage bill, but rather the distribution of wages. There was room to reduce costs while making wages more equal and reducing unnecessary layers of bureaucracy. The role of government as a provider of employment should be reviewed. The government could play a critical role as an “employer of last resort” as part of a stimulus package. This could take the form, for example, of a jobs guarantee scheme. The early civil retirement plan for the civil service needed to be reviewed. It could have detrimental impacts on health departments which already faced difficulty in retaining specialists.

Rural Health Advocacy Project (RHAP) submission
RHAP said it was concerned that harsh austerity measures in the form of expenditure cuts would exacerbate poverty and inequality and retard job creation and economic growth. The worsening fiscal position was threatening government’s ability to maintain existing levels of service provision and infrastructure investment.

The MTBPS indicated that the average nominal growth in spending on health over the medium term was 7%. This offered some some opportunities. Health spending had a role to play as a catalyst for inclusive growth. In the transition to universal healthcare, government would be investing a significant amount of money in health spending to roll out the National Health Insurance. Government needed to focus its spending efforts on improving existing facilities and the services offered there. If the transition was managed well, the additional investment could be used to stimulate employment, particularly of youth and women, in rural areas.

Due to various factors, such as higher transport costs, service delivery in rural settings was often more expensive than in urban centres. There were also additional costs in attracting and keeping health care workers in rural areas, such as a rural allowance or the provision of subsidised accommodation. On a per capita basis, service delivery also tended to be more expensive in rural areas because of diseconomies of scale. In South Africa, rural areas had been disadvantaged through historical and structural neglect . This meant that if social justice and equity were underlying principles in the budget process, then rural areas should be given priority when deciding on allocations.

RHAP advocated that departments and National Treasury should “rural-proof” budgets before they were finalised. An effective way of doing this would be to adopt a rural adjuster, that accounted for factors such as diseconomies of scale and the higher unit costs of goods and services in rural settings. A rural adjuster could be included in budgeting guidelines that National Treasury issued to provinces to use when they did their budgeting or it could be built in to a resource allocation formula used to determine the proportion of available resources a province or department should receive.

WoMin African Alliance and International Rivers submission
In a joint submission, the two organisations raised concerns that the government had made a commitment to participating in the Grand Inga Dam Project (GIDP) in the Democratic Republic of Congo (DRC) without adequate assessment of the financial implications.

They said while the budget of the Department of Energy (DOE) did not mention the project specifically, it was reasonable to conclude that the department would be incurring expenditure in the coming financial year and beyond because of a treaty between South Africa and the DRC committing South Africa to obtaining energy from the GDIP. The project would entail significant public expenditure over many years. Concerns had been raised over governance issues for the project, as was evident from a World Bank report on their withdrawal from the project in 2016.

The gravest concern was that government had committed to this project without there being any independent South African project appraisal and risk assessment. Before the South African taxpayer could underwrite any aspect of the development of this project, Parliament must ensure that a transparent and participatory project appraisal and legal and financial risk assessment was carried out. The project had the potential to significantly increase the country’s debt levels. Eskom as procurer posed a further significant fiscal risk given that its current state of governance was not in a sound and sustainable condition.

It was recommended that Parliament should ensure that the DOE disclosed what part of its budget was to be spent on the development of the GIDP before the funds allocated to the DOE were approved. The finance committees should recommend that the Budget Facility for Infrastructure (BFI) conduct a project appraisal and rigorously assess the feasibility, risks and proposed financing arrangements. No funds or loan guarantees should be approved for expenditure on the GIDP until Eskom had demonstrated that it was financially sustainable.

Pietermaritzburg Pensioners’ Forum (PPF) submission
A group of about 15 old age pensioners from Pietermaritzburg appeared before the committees for the fourth time to repeat their call for a substantial increase in the old age grant and a December bonus equal to double the monthly grant. In a written submission the pensioners, who addressed the committees in isiZulu, said they were disappointed that previous appeals to the government had not succeeded.

They said they were of the age group that were paid the lowest wages when they worked and who suffered the worst racial oppression and exploitation. The R1 780 a month pension took them nowhere.

The pensioners said they continued to contribute to South Africa in their old age. The pension played the same role as a wage did. It brought income into their homes. Many of them lived in homes where nobody worked. Their pensions supported children and grandchildren. They said their campaign was growing across the country and included in their submission a petition signed by more than 29 000 people.

Fiscal Cliff Study Group (FCSG) submission
The FGSC described a “fiscal cliff” as the point at which civil service remuneration, social grant payments and debt service costs absorbed all government revenue. This spending accounted for 72.3% of revenue in the 2019 MTBPS. In the February 2018 Budget the figure was 70.5%. In 2007/2008 it was 55.0%.

The precarious state of state owned enterprises (SOEs) would move the fiscal cliff closer. There should be greater transparency in the governance of all SOEs. At Eskom, all bonus payments should be stopped immediately. There should be a moratorium on employment and employment numbers should be published every Friday on their website. Eskom board meetings should be open to the public and the media.

The FCSG said there had been no response to previous recommendations that the central and provincial governments should buy vehicles only manufactured in South Africa. It welcomed the MTBPS cap of R800 000 plus VAT on the cost of official cars as a step in the right direction.

The study group said the civil service was unaffordable. The average wage increase across government was 6.8% in 2018/19, or 2.2 percentage points above inflation. After adjusting for inflation, the average government wage had risen by 66% in the past 10 years. There should be a moratorium on civil service appointments.

South African Institute of Chartered Accountants (SAICA) submission
SAICA said the MTBPS had shattered hopes for a fiscal policy that would create a climate conducive to economic growth. Expenditure continued to exceed revenue, debt was increasing at an unsustainable pace and the economy was not performing well.

The Minister of Finance had announced that government was contemplating additional tax measures to be announced in the February Budget. This was in spite of significant increases in recent years in VAT, tax on dividends, estate duty, fuel levy and the introduction of the sugar tax and carbon tax. South Africa’s tax to GDP ratio had increased to 29.3% against the world average of 15.4%. The corporate tax rate of 28% was high compared to South Africa’s main trading partners and other developing countries. It could not be increased without jeopardising investment. Personal income tax was also high. A major concern was the country’s dependency on a small number of taxpayers - 540 000 taxpayers were responsible for more than 50% of total income tax collected. Increasing personal taxes or wealth taxes might result in the loss of highly mobile high net worth individuals and their skills and talents. A wiser option might be to lower tax rates to stimulate the economy and increase tax revenues in that way.

The average government wage has risen by 66% after inflation over the past decade. Should the wage bill continue to grow at this rate, it would account for 100% of tax collections by 2040. The Minister’s announcement of cost cutting in relation to cell phones, vehicle procurement and travel expenses and a freeze on executive salaries was “not remotely enough". Drastic reduction and tough decisions were required.

SAICA urged that urgent consideration should be given to privatising at least parts of Eskom.

Tobacco industry submission
Organisations representing tobacco marketers, processors and growers called for excise duties on cigarettes to be frozen at 40% for three years while SARS strengthened its capacity to crack down on the illicit trade in cigarettes. The Tobacco Institute of Southern Africa argued that the high cost of legal products encouraged smokers to buy illegal, untaxed cigarettes. It was estimated that about 12 billion of the 35 billion cigarettes smoked annually were not taxed, costing the fiscus more than R11 billion. The legal industry had shrunk by 22% in the past three years. Tobacco farmers were producing 15% less, leading to job losses in rural areas.

The Black Tobacco Farmers Association said tobacco farming in South Africa was on the verge of total destruction. Tobacco used in illegal cigarettes was imported from cheap farmers in other African countries. Every time excise taxes were increased the government was “playing right into the hands of foreign producers and their criminal customers at the expense of honest and law-abiding South Africans".

Discussion
Mr G Hill-Lewis (DA) said he agreed with COSATU on what he termed exorbitant management salaries in the public sector. The DA had made a proposal on how R168 billion could be saved merely by dealing with the 29 000 “millionaire managers” while protecting nurses and teachers who delivered services directly to the public. He said there was a contradiction in COSATU calling for cheaper electricity but opposing retrenchments at Eskom. There was evidence that Eskom was over-employed by about 15 000 people.

To the BJC, Mr Hill-Lewis said no one liked austerity measures but with a debt to GDP ratio of 70% within the next three years, public expenditure had to be brought under control. It should not be forgotten that South Africa was paying R300 billion a year on the “national credit card". More debt would mean more interest charges and squeeze out spending on services. He agreed it was completely wrong to make poor people pay through, for example, cuts in funding for treatment of cervical cancer and for eliminating pit latrines at schools. However it was also unacceptable to pass that austerity to private households by taxing them more. The solution was to cut waste in the public sector.

Mr M Moletsane (EFF) asked by what means the pensioners had travelled to Cape Town and who had paid for their journey.

Mr G Skosana (ANC) took up COSATU’s point about the number of public servants in comparison to the total population. This indicated that the public service was not bloated in terms of numbers. However, the wage bill had increased significantly. The Minister wanted to target the high earners and COSATU seemed to agree with this.

Mr Y Carrim (ANC) asked what proposals COSATU had for a “just transition” for Eskom employees. The submission on the Inga project had raised new issues which deserved to be taken seriously by Parliament. Mr Carrim said there was broad agreement with the RHAP submission. He urged them to come forward with firm recommendations about how its concerns could be addressed in the Budget.

The submission by the pensioners would be forwarded to Parliament’s appropriations committees. While there was moral agreement with their case, the practicalities of giving effect to it had to be considered. There had to be trade-offs in spending. The poor were not only pensioners.

Mr Carrim said that, while he had his own views on smoking, tobacco was not illegal and there was no choice but to raise maximum tax revenue from it.

Mr I Morolong (ANC) asked the FCSG how long they believed a moratorium on public service appointments should be and what effect this would have on service delivery areas where there were staff shortages.

Mr Mathew Parks, COSATU Parliamentary Coordinator, told Mr Hill-Lewis that many of the 29 000 high earners were medical doctors. However, he agreed that the fat had to be cut. The Public Service Bargaining Council had to be engaged on the 128 000 vacancies in the public service in the light of staff shortages in critical service areas. There was some positive news on Eskom which COSATU agreed was in a life or death struggle. Staff numbers had been reduced by 2 000 as a result of natural attrition. The Minister of Public Enterprises had proposed that excess staff be transferred to municipal electricity departments.

Mr Russell Rensburg, RHAP Director, said the risk of a one-size-fits-all approach to cutting budgets was illustrated by the Gauteng mental health scandal. There had to be a look at the way in which government spent on goods and services. Expenditure had to be more redistributive. Employment opportunities could be created in rural health services. Spending had to be aligned with the 80% of the population living outside the five big metros. “There is not a single story for our challenges,” he said.

Speaking on behalf of the pensioners, Ms Noxolo Mfocwa, said they were calling for a pension that was closer to the national minimum wage. They wanted at least R2 500 a month. A December bonus would be an interim measure which would enable them to buy Christmas presents and school uniforms for children in their families. The first time the pensioners visited Parliament, they had travelled by bus. Their supporters were saddened by this and had raised funds for the subsequent journeys. A full list of donors could be found on the Pietermaritzburg Pensioners’ Forum’s website.

Ms Busi Sibeko, of the Budget Justice Coalition, said innovative ways of raising revenue could be found. What about the digital economy and Airbnb or Uber? Austerity had to be weighed against the cost to human lives. Mr Daniel McLaren of the BJC said the choice lay between cutting services to those who needed them most or raising taxes on those earning more than R1 million a year.

Prof Jannie Rossouw of the Fiscal Cliff Study Group said South Africa had used deficit financing for a decade, and it had not worked. “The South African government cannot currently show the capacity to repay the money it is borrowing ,” he said. There was “bureaucratic overload” in the public service, with too many people in head offices watching other people do the work. If they were brought back to the coalface there would be enough teachers and nurses. On the proposed moratorium, he replied it would probably have to last until the wage bill was down to 33% of government revenue from the current 46%.

Mr J Maswanganyi (ANC) closed the meeting by giving an assurance to the presenters that the committees would give serious consideration to their submissions.

The meeting was adjourned.
 

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