2020 MTBPS: National Treasury briefing, with Ministry

This premium content has been made freely available

Finance Standing Committee

29 October 2020
Chairperson: Mr J Maswanganyi (ANC) and Mr Y Carrim (ANC; KZN)
Share this page:

Meeting Summary

Video: JM: Standing & Select Committees on Finance and on Appropriations (NA & NCOP)) 29 Oct 2020

2020 Medium Term Budget Policy Statement (MTBPS)
Budget Documents
MTBPS Call for Comment

In this virtual meeting, the Finance and the Appropriations Committees of the National Assembly and National Council of Provinces, as well as provincial committee members, met with the Minister of Finance and National Treasury for a preliminary discussion on the Medium Term Budget Policy Statement which the Minister had delivered to Parliament the previous day.

The Minister of Finance stated that the economy is now in the danger zone, as any slippage can lead to debt being 100% of the Gross Domestic Product (GDP) or greater than GDP. The issues highlighted were the rising debt servicing costs, funding the South African Airways business rescue plan – which required scrambling from different departments in order to put together the R10.5 billion. The greater burden of this was on education and police. The economic outlook shows an estimated economic contraction of 7.8%, a tax revenue collection decline to R322 billion and a fiscal deficit of 15.7%, of GDP. Treasury pointed out to Members that a second wave of COVID‐19 infections, accompanied by new restrictions on economic activity, would have significant implications for the outlook.

In line with the President’s economic recovery plan, Treasury considers economic reform as a key part of addressing low growth challenges and low long-run economic output. In the short-term, it will focus on building infrastructure, expanding electricity generation, allocating digital spectrum, and supporting rapid industrialisation and employment. Longer-term structural reforms include modernising network industries, reducing barriers to entry, and increasing regional integration and trade. Treasury emphasised that Government needs to arrest the build-up of unsustainable debt and elaborated on its proposed steps to reduce the fiscal deficit and stabilise the debt‐to‐GDP ratio over a five‐year period. This includes reductions on non-interest spending, however, the Infrastructure Fund is protected. To assist with the fiscal consolidation, government has projected tax increases of R5 billion in 2021/22, R10 billion in 2022/23, R10 billion in 2023/24 and R15 billion in 2024/25. Gross national debt is projected to stabilise at 95.3 per cent of GDP by 2025/26. NT aims to achieve a primary budget surplus in 2025/6. Another concern was the public wage bill. Treasury proposes growth in the public‐service wage bill of 1.8 per cent in the current year and average annual growth of 0.8 per cent over the 2021 Medium Term Expenditure Framework (MTEF) period.

During the discussion, Members raised concerns around the lack of room for additional borrowing and the eventual crowding of basic services. Amidst this, the Committees asked the Minister why SAA was bailed out again and how government justifies shifting resources from education and police, which are basic services for society’s most vulnerable. Another concern was the whether the public sector unions and other bodies agreed to the freezing of salaries in the public sector and the possibility of protests due public wage bill.

The Committees questioned the implementation of zero-based budgeting (ZBB) and Treasury’s plans to stimulate the economy at the local level. Members raised the issue of illicit flows and Parliament’s prescription of inter-ministerial committees to raise greater interdepartmental cooperation around this issue.

The Committee requested Treasury to give a full presentation on the debt management strategy and how the President’s Economic Recovery Plan will be implemented.

Meeting report

The Chairperson welcomed everyone in attendance and noted an apology from Mr S Buthelezi (ANC), who will be joining the meeting late.

The Committee Secretariat noted apologies from Mr G Hill-Lewis (DA), Mr O Mathafa (ANC), Ms M Dikgale (ANC), Mr A Emam (NFP), Mr M Moletsane (EFF, Free State), Ms M Mamaregane (ANC, Limpopo), and the Finance Committee Chairpersons of the Mpumalanga and Western Cape provincial legislatures.  

Co-Chairperson Carrim announced that some Members may have to leave from 14:00 due to provincial week engagements.

Briefing by National Treasury 
Mr Tito Mboweni, Minister of Finance, requested the Committees to observe a moment of silence for the late Professor Daniel Plaatjies from the Financial and Fiscal Commission.

He stated that the Fiscal Framework is the most important part. The Supplementary Budget in June painted an active scenario that aimed to stabilise debt in 3 years. The economy is now in the danger zone, as any slippage can lead to debt being 100% of the Gross Domestic Product (GDP) or greater than GDP. Another issue is the rising debt servicing costs, which should be carefully managed.

The Minister pointed out that funding the South African Airways business rescue plan required scrambling around from budget votes. Ultimately, the R10.5 billion came from different departments. The greater burden of this was on education and police. The fiscal deficit is 15.7%, of GDP. The economy is expected to contract by 7.8% in 2020, and tax revenue is estimated to decline to R322 billion. Lastly, he highlighted that debt is rising to 95% of GDP.

The Minister requested to brief the Members on the water board crises being faced by municipalities,
that if there is time remaining after presenting the MTBPS.

Mr Dondo Mogajane, Director-General, National Treasury, stated that there are 3 things the budget is concerned with:
-Saving lives through providing massive health responses and providing relief to households and businesses in response to the pandemic.
-Crystallising the economic and recovery plan. Mr Mogajane thanked members of civil society and business partners for respective contributions to the plan.
-Ensuring the stability of public finances by showing the 5-year fiscal framework.

Mr Edgar Sishi, Acting Head: Budget Office, National Treasury, stated that South Africa entered the COVID-19 crisis in an already weak economic condition. The crisis caused an economic contraction locally and globally, however, a growth recovery is projected for the global economy next year. Developing countries are set to grow faster than their developed counterparts next year, with emerging economies such as China and India being major contributors. Sub-Saharan African economies are projected to grow by 3% next year. South Africa’s real GDP growth will average 2.1 % over the medium term, with output only returning to pre‐ pandemic levels in 2024. The domestic economic outlook shows that the size of the South African economy has shrunk from just over R5 trillion last year to just over R4.8 trillion. Investment levels are projected to have some weakness but will be stronger next year than this year. The risk is that a second wave of COVID‐19 infections, accompanied by new restrictions on economic activity, would have significant implications for the outlook.

Mr Sishi highlighted the economic recovery plan and pointed out that Treasury considers economic reform as a key part of  addressing low growth challenges and low long-run economic output. In the short-term, it will focus on building infrastructure, expanding electricity generation, allocating digital spectrum, and supporting rapid industrialisation and employment. Longer-term structural reforms include modernising network industries, reducing barriers to entry, and increasing regional integration and trade. These reforms can raise growth to over 3 per cent over the next 10 years and create more than 1 million jobs. Regarding revenue, the extraordinary shock to economic output in 2020/21 translates into large revenue shortfalls that will persist over the medium term. In the global context, South Africa. In comparison with a wide range of other developing countries, South Africa’s average primary balance over the last 10 years falls in the middle of the distribution. However, the three‐year increase in debt to GDP is the among the largest. Government needs to arrest the build-up of unsustainable debt. The fiscus is deteriorating and has been characterised by rising debt and debt-service costs, deteriorating government balance sheet, including state‐owned companies and municipalities struggling to pay salaries and other operational costs.

Mr Sishi elaborated on the proposed steps to reduce the fiscal deficit and stabilise the debt‐to‐GDP ratio over a five‐year period. This includes reductions on non-interest spending, however, the Infrastructure Fund is protected. The proposed spending reductions will improve the composition of spending from consumption towards investment. The main budget and primary balances will narrow over the medium term. National Treasury aims to achieve a primary budget surplus in 2025/6.

Mr Sishi highlighted how government aims to achieve wage bill reductions. It proposes growth in the public‐service wage bill of 1.8 per cent in the current year and average annual growth of 0.8 per cent over the 2021 Medium Term Expenditure Framework (MTEF) period. He elaborated on the expenditure priorities over the MTEF period. The fastest-growing functions are economic development and community development. Lastly, he presented Members with the major medium-term risks to the fiscal outlook, which includes the uncertainty around the speed of economic recovery, and the additional spending pressures from state-owned entities (SOEs).

Ms Tshepiso Moahli, Acting Head: Asset & Liability Management, National Treasury, presented the financing and debt management strategy. She highlighted that there have been slight improvement in the national gross borrowing requirement and financing, since Treasury’s estimation in June. However, the borrowing-requirement is projected to increase significantly over the medium-term.  Even so, the debt portfolio remains within all its strategic benchmarks. The active debt management strategy has served to mitigate risks from elevated market volatility.

(See Presentation)

Discussion
Dr D George (DA) asked if Treasury has relaxed its previous position on managing the deficit. He stated that there is no room to borrow anymore as basic services are already being crowded out. Why was SAA bailed out again? As an alternative, why is SAA not being sold or getting a private partner?  How does the state justify shifting money from basic services to the most vulnerable to an airline? Do the unions and other bodies agree to the freezing of salaries in the public sector? Regarding the structural reform initiatives, why is government not accelerating entrepreneurial activity instead of being fixated on infrastructure development for job creation?

The Minister of Finance replied that the R10.5 billion provided to SAA is not a bailout. It is an allocation in line with the specific requirements of the Business Rescue Practitioners (BRPs). A bailout would have been a large injection into SAA, which has not been budgeted for. Decisions on the formation of a new airline and the extent of private investment participation are outside of the mandate of the Finance Ministry. Discussions on new airline proposals need to be with the Minister of Public Enterprises, Mr Pravin Gordhan.

The Minister stated that the issue around the public wage bill needs to be approached strategically. Public civil servants are hard workers who should not bear the burden of sacrifices alone. The Executive, public representatives, and all others must make sacrifices given the current fiscal crises. He agreed that a public servants strike must be avoided, however the fiscal framework cannot be broken. He pointed out what happened in countries like Argentina, Greece and Ecuador.

Mr D Ryder (DA, Gauteng) requested an indication of how discussions in cabinet are going, regarding the possibility of going back to a hard lockdown. If so, what would the impact on the economy be? Given the debt trajectory, the developmental agenda will have to take a back seat as the state is moving from a developmental state to a survival state. Even so, Ministers have said spending on development will continue, which puts pressure on the deficit. Has zero-based budgeting (ZBB) been abandoned? Has the message to relook at projects and focus on survival reached the Members of cabinet?  Will there be any movements between budget line items in response to COVID-19?

Ms Moahli addressed the question on lowering the debt trajectory. There have been considerations such as a debt ceiling. There is also ongoing research on the best fiscal anchors to arrest the growth of debt.

Mr Sishi added that there is an existing fiscal anchor – the expenditure ceiling, which is outlined in chapter 3 of the MTBPS. Treasury has been working on additional anchors such as a debt ceiling, however, it needs to be backed up by a credible set of policies.

Ms Malijeng Ngqaleni, Head: Intergovernmental Relations, National Treasury, stated that there are no major allocations besides the R12.6 billion allocations for the Presidential Employment Initiative, which will be captured in the adjusted Division of Revenue Act (DORA). Out of this allocation, R1.5 billion will go to Municipalities towards funding the respective initiatives on job creation for social development and improved service delivery. For instance, there are initiatives towards job creation in education and improving health service delivery in response to the pandemic.

Ms Mampho Modise, Head: Public Finance, National Treasury, addressed the question on the ZBB. Treasury plans to conclude its spending reviews, which will be used as a tool to implement ZBB. It has done 50 of them so far. The starting point is to look at the spending reviews of National Treasury and the Department of Public Enterprises (DPE), derive recommendations and then implement ZBB within these 2 departments. The focus is on these 2 departments to gain an idea of the process before expanding to all other departments.
 
Mr S Du Toit (FF+, North West) stated that the President announced that 200 000 positions will be created in the educational sector. Given that funds have been take away from education, how will this be funded? Does pursuing expropriation without compensation contribute towards a slippage that is detrimental to the economy?  Will the escalating service delivery protests and municipal political infightings also contribute to the slippage? What steps is Treasury taking to ensure that the economy at the local level is being stimulated? This would lead to growth and eventually widen the tax base.

Ms Modise stated that Treasury has indicated budget reductions to departments, however it is still identifying which programme reductions will have minimal impact. Between now and the 2021 budget announcement, NT will engage with Departments to ensure service delivery is minimally impacted.

Ms Ngqaleni replied that NT is taking steps to ensure that Municipalities are reliable in providing basic services, such as water and energy, to ensure business can operate and stimulate the local economy. The poor financial state of municipalities, emerging from poor governance, has an impact on service delivery. Hence Treasury’s efforts in pushing for the District Development Model (DDM), targeting the lack of coordination and alignment, and improving planning and capacity.

The Minister replied that the issue of expropriation without compensation does not fall under his lane.

Mr I Morolong (ANC) asked for details on where the proposed tax increases will come from. Which tax line items are being looked at? The MTBPS mentions making adjustments to the remunerations of senior public servants, to bring down the cost of the public wage bill. How would such a process be undertaken and have there been engagements with the Department of Public Service and Administration (DPSA) on this? To what extent does NT believe the tabled economic recovery plan has been appropriately budgeted for?

Mr Ismail Momoniat, Head: Tax & Financial Sector Policy, National Treasury, replied that the source of additional revenue is only identified when the tax proposals are done, which is on budget day. When the MTBPS is drafted, options are still kept open in order to monitor whether there is growth. Treasury is not looking at significant tax increases. Decisions around this have not been made as yet.

The Minister of Finance replied that there are ongoing strategic conversations with the DPSA and the public sector trade union movement, led by Minister Senzo Mchunu of the DPSA. Minister Mchunu is dealing with the issues around this matter. The economic recovery plan has been catered to in the MTBPS. However, the economic reconstruction and recovery programme is not purely government funded. It aims to unlock private investment and government infrastructure investment, and other opportunities. Treasury also expects the private sector to invest as much as possible. For instance, the structural reform programmes are looking at expanding harbours for increased trade activity, especially with the African Continental Free Trade Area.

Ms P Abrahams (ANC) commended Treasury for coming up with a plan during tough circumstances. She asked if the projected improvements in revenue collection would still be the case given the threat of a second wave of COVID-19? She requested the Minister to brief the Committees on the water board crisis. She asked for details on the now five-year plan to stabilise debt.

Mr Momoniat replied that Treasury is optimistic, despite the risks of a second wave, which would have a severe impact on the economy. Revenue collections are expected to improve a bit, even though there may be no growth. Even with the second wave, the state has learned how to live with and navigate the virus.

Mr J Mpisi (ANC, Gauteng) asked how Treasury will handle the situation with public sector labour unions, who have disagreed with the Minister’s proposal on the public wage bill.

Mr W Aucamp (DA) pointed out that the presentation mentioned that “any slippage may lead to debt becoming 100% of GDP”, yet the state is bailing out a failing SAA. Eskom has been bailed out and government is also dealing with the Land Bank. Can the economy afford to do anymore bailouts?

Co-Chairperson Carrim stated that the issue of illicit financial flows has been raised by Committees several times since 2015. Parliament recognised the need to raise greater interdepartmental cooperation around this issue. It prescribed to the President and Executive which inter-ministerial committees (IMCs) can be set up. What is being done about this given that there was no response from the President or Ministers? Is there no case for an inter-ministerial committee structure with the Minister of Finance as the head?

He pointed out that Parliament needs to be more creative and offer alternatives in order to move on from recurring questions and arguments, such as on the bailouts. He requested that Parliament’s reports be more decisive on what it would like to see done.

The Minister of Finance disagreed with the proposal for an IMC to approach the illicit flows of finance. Issues of Finance reside with the Ministry of Finance.  Dealing with the illicit flow is the job of SARS and there is nothing an IMC can do. He added that he will not support the notion either.

Mr Momoniat replied that there are multiple sources for illicit flows, which need other authorities to come in. For instance, illicit financial flows coming in from drug trade would require the police to intervene. SARS takes steps to deal with specific issues. The other source of flows was with the Guptas and State Owned Enterprises (SOEs), which require another mechanism. Having an IMC may not be able to solve problems around illicit flows. Government needs to make sure the appropriate authorities do what each is responsible for. The ability to assess the source is also what is important.

Co-Chairperson Carrim stated that the IMC proposal came from 5 Committees, namely, the Finance, Minerals, Trade, Justice and Police Committees. The Committee also had several engagements with National Treasury, SARS and the Hawks on the matter. Treasury previously told the Committee that it hands over matters to Police and the Hawks. The five Committees were then brought together and IMCs became a recurring topic to improve the coordination between the authorities. However, Treasury has now changed its position in stating that it is simply SARS’ duty. It is a multi-ministerial issue. If an IMC is not plausible, then an alternative must be used to ensure the Minister holds the respective departments accountable.

The Minister stated that due to time running out, he would return to elaborate on the water board crisis some other time.

Co-Chairperson Maswanganyi stated that the Committees will need a full presentation on the debt management strategy when dealing with the February budget. He agreed that unmanaged debt can lead to the crowding out of services, and result in unrest in the country and must be avoided. He also requested a briefing on how the President’s Economic Recovery Plan will be implemented. He added that the MTBPS mentions that the Public Procurement Bill will come in 2021/2, however, it has been in the pipeline since 2017. NT and the Committee will have to engage on this as there is vested public interest in the Bill. The sooner it is tabled, the better as it would enable many players to be empowered through public procurement.

Closing remarks
Co-Chairperson Maswanganyi, in closing, announced that the Committee will meet again next week Tuesday, Wednesday and Friday.

The meeting was adjourned.
 

Download as PDF

You can download this page as a PDF using your browser's print functionality. Click on the "Print" button below and select the "PDF" option under destinations/printers.

See detailed instructions for your browser here.

Share this page: