National Treasury and SARS 2009/10 Annual Reports: briefing by Minister of Finance

Meeting report

Comments by the Minister of Finance
The Minister of Finance, Mr Pravin Gordhan, said 2009 marked the period of the worst recession in 70 years for both the world and South Africa.  Its impact was greater than the Great Depression, because the world was much more globalised and the financial system much more developed.  Within this context, South Africa had coped remarkably well.  The two key institutions influencing the economy, SARS and the National Treasury, had had to do extraordinary things to ensure the country emerged as unscathed as possible. 

This involved the National Treasury in understanding the depth and impact of the crisis, and determining whether South Africa’s banking and financial systems were resilient enough.  In the event, the country’s banking system proved one of the few in the world to have survived.  Secondly, the National Treasury had had to provide an economic and fiscal response, and made the key decision to borrow money and increase the deficit – from a low level – so that the government’s service delivery programme would not be compromised and the effects of the crisis would be cushioned.  It had been estimated the deficit would increase to 7,3%.

The other side of the coin was the role of SARS, which would have to cope with a huge drop in revenue – from a 28,5% tax to GDP (Gross Domestic Product) ratio, to what eventuated as a 24% ratio.  The response of SARS had been to avoid revenue “leakage” by tightening up on compliance.  This had been so successful that the eventual deficit was only 6,7%, not 7,3%.

This was a period in which there were massive job losses around the world – South Africa’s 25% compared with Spain (above 20%) and the United States (above 10%).  South Africa had lost almost a million jobs, but the gradual recovery of the economy had not been matched by a similar recovery rate in jobs.  A “safety net” had been put in place, but while tens of thousands of jobs were saved, these initiatives were not enough to make a meaningful dent in the number of jobs lost.  The infrastructure programmes, particularly those leading to a successful World Cup, had helped to soften the impact, but the challenge was now to find a similar “Wold Cup-style investment”.  This would emerge only in the next few months, during the budgeting process.

Mr Gordhan said the National Treasury Director-General and himself had recently returned from a World Bank meeting in Washington, and indications were that growth in the developed countries would be fairly modest, while emerging market economies were expected to grow by 4,5% to 6%, led by countries such as China, India and Brazil.  This represented an interesting switch from the previous reliance on advanced countries to maintain high growth levels. The challenge facing South Africa was that the expected economic growth was not sufficient to tackle the unemployment situation.

A major discussion item in Washington had been South Africa’s appreciating currency, and it had become clear that the country’s situation was not unique.  This was a global phenomenon, particularly among countries that had a lot of commodity trading and resources, like Australia, Brazil and South Africa – and even Thailand, Indonesia and Korea.  It needed to be appreciated that while there were country-specific trends that gave rise to capital flows, there was a wider set of structural problems in the world, and these would not be solved by unilateral and unco-ordinated actions on the part of a few countries.  Some countries still wanted to do “quantitative easing” – meaning putting more money into the market place – and having very low domestic interest rates.They were able to borrow at low rates and invest in countries with higher interest rates, such as Brazil (9%) and South Africa (6%), make a short-term profit and move on.  This trend had raised concerns around the world, leading to a concensus that unless the G20 took on the responsibility of getting the major players to sit around a table and, in a spirit of co-operation and generosity, find a solution to these structural imbalances, a “currency war” (in the words of Brazil’s Minister of Finance) would result.  Everyone wanted to depreciate their currency, and everyone wanted to export their way out of trouble,  These were serious structural problems, which would have to be addressed in the next few weeks.

Another issue raised in Washington had been the proposed reform of the International Monetary Fund (IMF) and World Bank.  There had been agreement that there would be a shift in quotas from developed to developing countries – from the “haves” to the “have nots” – so it had come as a shock last week when it emerged that countries like South Africa and Nigeria on the African continent must lose almost 20% of their quotas so that other smaller developing countries might gain some quotas.  This amounted to taking from the “have nots” to give to other “have nots”, rather than taking from the “haves”!  An intensive process of negotiation was going on, and it was hoped a more just outcome would be reached before the leaders’ meeting of the G20 in Seoul.

On the revenue side, there were indications that things were looking better this year.  This did not mean there had been a massive recovery, or that the tax base had grown, or that South Africans were spending more freely. There were technical reasons, such as the slowdown in VAT refunds and changes in rules for the payment of provisional tax for corporations, effectively pulling money into this year which belonged in next year.  Any thoughts that there was too much money around needed to be dispelled.

Looking back on the past year, counter-cyclical policies had been put in place, and the effect of what was often considered a theoretical concept, had been demonstrated.  The question to be asked was, what would contra-cyclicality mean when conditions got better?  When lots of revenue started to come in, the government would need to move into a different cycle.  The key focus would have to be, not how much money there was to spend, but what the quality of the outcomes would be.  This was a matter for consideration by the joint committees.

Overall, South Africa could be very proud that its banking and regulatory systems had held up, its counter-cyclical policies had worked, and revenue collection had been sustained.  However, while things were looking better in the current fiscal year, there were many risks which were not present last year, which needed to be anticipated.

Director-General of National Treasury
The Director-General, Mr Lesetja Kganyago, presented the Treasury’s major achievements during the period under review.

South Africa’s credit ratings had been maintained at BBB+ by Fitch and Standard and Poor’s, while Moody’s had upgraded the long-term foreign currency rating from A3 to Baa, demonstrating confidence in the country’s macro-economic and fiscal policies.  Debt as a percentage of GDP had remained low compared to many developed economies, although it would rise over the next three years.  Spending on infrastructure had boosted economic activity, especially in the construction sector.  The financial sector regulatory standards had helped to ensure that the banking system remained sound and relatively unscathed by the global financial crisis.

As a result of government’s focus on financial management, reforms had been implemented in 120 provincial departments, which far exceeded the original target of 30.  At municipal level, the Treasury was now publishing reports detailing each municipality’s over- or under-expenditure separately, where previously there had been only a global figure.  This enabled individual municipalities’ spending to be scrutinised.

In the field of technical and management support, the Technical Assistance Unit (TAU) was supporting 60 projects, and had completed seven.  Analysis had begun on five tertiary hospitals identified by the national Department of Health as potential Public Private Partnerships (PPPs), and the feasibility studies would be completed during the current budget period.

Mr Kganyago said the key responsibility of the asset and liability management programme was to meet the government’s borrowing needs of R187,4 billion, and this had been achieved comfortably.  The national and provincial governments had saved about 3% on borrowing costs through an inter-governmental cash co-ordination system, in terms of which provinces sitting on surplus funds deposit it with the Treasury, and borrowed it back when they needed it, rather than having to borrow from a commercial bank.

The financial accounting and reporting programme had seen 1 334 officials trained to provide support to provincial treasuries, so that they could better prepare provincial consolidated financial and revenue fund statements, and implement Generally Recognised Accounting Practice (GRAP) standards.  Internal audit reviews at 26 municipalities had been conducted, as planned, and the financial management skills of 7 496 officials from 283 municipalities had been assessed.

Taking into account the high level of supervision of the local financial system, South Africa had moved away from merely complying with international standards towards actually shaping what future standards should look like, in discussions at G20 meetings and with the Financial Stability Board.  Although it was recognised that the country had a well regulated system, its effectiveness was being reviewed with key financial regulators to ensure there was no “resting on laurels.” 

Mr Kganyago said South Africa “punched above its weight” in international forums, co-chairing G20 working groups on International Finance Institution reform, growth and development.  It had assisted in securing a $3,75 billion World Bank loan to finance Eskom’s infrastructure development aimed at increasing the country’s power generation.  It had also increased its coordination and cooperation with other emerging market and developing countries on issues such as the reform of the Bretton Woods Institutions and the modalities of G20 engagement.

He said the Treasury’s staff vacancy rate had been reduced to 6,75%, and the total staff complement was “fairly diverse,” with 56% being female and 78% being black, while 66% of senior management was black and 43% female.

Commissioner of SARS briefing
Mr Oupa Magashula, SARS Commissioner,  said that the decline in economic conditions had resulted in a year-on-year fall in overall revenue of R26,4 billion – the first such fall in SARS’s 13-year history.  Only collections from personal income tax (bolstered by above inflationary wage increases ), the fuel levy and excise duty showed gains, but these were not enough to offset the drop in corporate income tax of R30,2 billion (18% lower), VAT of R6,4 billion (4%) and customs duties of R3,2 billion (14%).  However, special initiatives had been identified which had enabled the revised revenue collection target to be exceeded by R8,4 billion.

Economic conditions had also taken their toll on the debt book, which grew 23% to R85,8 billion, while the credit book declined by 7,3% to R42,2 billion.  The increase in debt reflected the difficult economic circumstances in which both corporate and individual taxpayers found themselves, affecting their ability to pay on time, or at all.  Similar trends had been experienced worldwide.

Significant gains had been made in providing individual taxpayers with a statement of account on demand, the redesign of the PAYE submission, reconciliation and payment process, and the expanded use of eFiling.  Over the next two years, it was planned to go even further towards a system in line with modern banking, in which taxpayers were in control of their accounts, payments and transfers, and this should significantly reduce both the credit and debit books.

Despite the economic conditions, there had been a marked improvement in compliance, especially in terms of tax returns submitted on time.  SARS had received 3,1 million returns by the end of last year’s tax season, compared to 2,4 million the previous year, reflecting a compliance of 79%, compared to 58%.  Equally encouraging was the trend by taxpayers to submit their returns earlier.  In 2008, only 427 000 returns had been received eight weeks into the tax season, compared with 1 million last year, and this year the 1 million mark had been topped in just seven weeks.  The introduction of an effective new penalty regime and the significant improvement in risk detection provided by third party data and other sources, was bearing fruit at exactly the time it was most needed to drive compliance.

There had been a clamp down on fraudulent VAT claims through a focused effort to remove bogus VAT vendors and to tighten up on VAT registrations to ensure legitimate access to the VAT system, which had seen some 16 000 VAT vendors suspended during the year.

Mr Magashula said the SARS modernisation programme, embarked upon in 2007 and aimed at transforming the income tax process from a complex paper-based and labour-intensive process to a simplified and automated process, had delivered great results and gone a long way to strengthening the compliance aspect.  Over the past three years, the number of registered eFiling users had increased from 500 000 to over 6 million, with the number of electronic returns increasing by 720% across income tax, VAT, PAYE, SDL and UIF tax products.  Turnaround times for the assessment of returns had significantly improved, with almost 95% being processed within 24 hours last year, compared with 62% a year earlier.  In most cases, this resulted in refunds being paid directly into taxpayers’ accounts within 48 hours, providing swift relief to cash-strapped consumers.

SARS had taken the bold step of buying a local software development company, Clidet, in order to secure the intellectual property for an advanced integrated customs and border management system.  The benefits of buying the company had been to reduce risk significantly and to provide SARS with internal competence in a highly specialised area.  Future gains from the implementation of this system elsewhere would be used to off-set the purchase price, as well as the continuing cost of implementation and development.

For the sixth consecutive year, SARS had received an unqualified audit, which was much more than a mere governance requirement and a fulfilment of its financial responsibilities.  The accountability of public institutions and the faith the public had in them was a key ingredient in the social contract between taxpayers and the state, and was a direct contributor to greater compliance.

Mr Magashula said a major achievement had been the launch of the African Tax Administration Forum (ATAF) in Uganda, which South Africa had pioneered and now chaired.  It had attracted over 30 African countries as members, and formed the basis for closer cooperation and engagement between revenue authorities on the continent.

Prevailing conditions had presented SARS with its sternest test yet.  However, the strong foundation laid and the foresight of the leadership over the past ten years had enabled the organisation to navigate these conditions with relative stability, certainty and confidence.

Discussion
Dr D George (DA) referred to the recent pulic sector strike and wage settlement of around 7,5%.  He said this was above the inflation rate and had not accompanied by productivity increases.  He asked whether the Minister would change this cycle, as it did not seem to be beneficial to the economy.

The Minister replied that the challenge facing the government was to what extent it wanted to continue increasing the wages of current public servants, and to what extent it wanted to employ new public servants, particularly in frontline delivery areas such as doctors, nurses and teachers.  If it continued to increase current benefits for current workers, it crowded out future employment.  Attention also had to be given to hiring too many people in a bloated administrative section at the expense of the service delievery side – a trend that was causing concern.  He accused certain provinces of a lack of control in this regard.  If these imbalances continued, with the wrong people employed in the wrong places, “we would continue to shoot ourselves in the foot.”  There needed to be a trade-off between continuous increased benefits for current workers, and the need to employ properly qualified and trained service delivery personnel.  However, sections of the public sector faced challenges in certain areas such as housing, and a commitment had been made to sit with the trade unions and try to find “extraordinary” solutions in this regard.

Mr S Montsitsi (ANC) asked the Minister about the special pension dispensation for non-statutory forces, which was intended as a “safety net,” particularly for those laid off from the existing Defence Force.  As many recipients were unemployed and in the queue for RDP houses, and the pensions were intended as a special dispensation to redress past imbalances, he questioned the rationale behind imposing taxation.  He also said the pension “buy back” scheme was beyond the means of most former combatants.
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         The Minister replied that the special pension dispension was currently under discussion, and there was a commitment to level the playing field.

Mr D van Rooyen (ANC) said that many criminal matters that were referred to the police after the intervention of the National Treasury, were not followed through owing to an apparent lack of co-operation with law enforcement agencies.  He asked if any measures were being considered so that these cases could be brought to an appropriate conclusion.

The Minister agreed that a more efficient chain was needed – from investigation to imprisonment.  Numerous efforts were being made to expedite this, and alternative methods were being developed.  The Minister of Public Service and Administration had announced the formation of a new anti-corruption unit, which would result in government employees caught red-handed being brought expeditiously before a disciplinary committee to face a judicial process, rather than the current situation of being suspended on full pay while the process dragged on for up to three years.  This was untenable and would now stop.

Dr Z Luyenge (ANC) expressed concern about the levels of “naked corruption” in the field of procurement among government departments that were “rotten to the core,” and asked what Treasury’s view was on addressing this issue.

The Minister described corruption was “a cancer” that required a very forceful public stand on the part of  government structures.  At present there were not enough voices speaking out against corruption, and the problem could not just be left to the investigators.  The more the public could become involved, the better it would be for everyone, as it was the ordinary people who suffered most from corruption.

At this stage, the Minister left the meeting.  Subsequent questions were answered by members of the Treasury and SARS delegations.

Dr George asked whether SARS had any plans to target specific sectors, such as the taxi industry, to broaden its tax base.

Mr Magashula replied that SARS addressed three areas to broaden its tax base – finding taxpayers to ensure they were in the net, establishing whether the amount declared for tax was correct, and collecting payment and whatever penalties were due.  Strategies were in place to tackle all three areas, with sectors such as the taxi industry being part of the first category.

Mr T Chaane (ANC) said rural municipalities faced a challenge in making use of local government financial management grants, which were intended to help build capacity.  If one broke down the figure of 894 graduate interns, it appeared most were deployed to metro areas and large municipalities.  He asked what Tresury was doing to ensure that there were at least three graduate interns in all 283 municipalities.

Mr Freeman Nomvalo, Deputy Director-General in the Office of the Accountant-General, said the grants were aimed specifically at helping all municipalities to get interns.  The problem was that very few people wanted to go to remote rural areas.  The process was also hampered by some leaders resisting the intern system, but programmes had been introduced to train lower level staff to improve their financial management capabilities.

Mr Chaane asked what could be done to ensure municipalities submitted their financial reports on time.
 
Mr Nomvalo replied that this was simply a case of leadership at municipal level taking the matter seriously, as they could always receive the assistance they needed, through the national or provincial treasuries, or private service providers, to submit their reports timeously.

Ms Z Dlamini-Dubazana (ANC) asked what monitoring tool was employed by Treasury for grants to municipalities, as it appeared that it was good at transferring funds, but not at monitoring their use.

Mr Kenneth Brown, Deputy Director-General for Intergovernmental Relations, said there was a compliance assessment guide with 18 criteria against which the 17 major muncipalities’ budget preparations were assessed.  On the implementation side, monthly reports were received from all municipalities, with almost 100% support.

Mr Chaane said he understood the infrastructure grant to provinces was intended for the rehabilitation of existing health, education, road and agricultural infrastructure.  He asked why little work had apparently been done on agriculture, even though the grant had been increased to cater for the replacement of “mud schools” and repair of coal haulage routes.                                                                                                                                                                                                                                                                                                                                           
                             
Mr Brown said provinces had spent about R40 billion on infrastructure, of which Treasury had contributed about R10 billion.  Provinces reported on their total expenditure, and not just the Treasury’s portion.  An amount of R2,7 billion had been allocated for the replacement of “mud schools”, or unsafe educational structures,  It was intended to accelerate this programme as part of its overall social infrastructure approach to duplicating the effect of  the World Cup on economic activity.

Mr N Koornhof (COPE) said queues at SARS offices were very long, necessitating taking a day off to have simple questions answered, which did not equate to good service delivery.

Mr Magashula acknowledged that SARS needed extra offices in order to expand its footprint, as it had become a victime of its own successes.   At peak periods, the organisation was having to deal with 120 000 people a day.

Mr R Lees (DA) asked for reassurance that the SARS computer was stable, and that nothing similar to the Cipro collapse could occur.  Although his personal eFiling experience was that it was an excellent system, one battled to get on to it at peak periods.

Mr Magashula said comparisons with the Cipro or e-Natis systems needed to be debunked.  The system was stable, and there was a back-up system in place.

The Co-Chairperson, Mr Mufamadi, commented that the provincial treasuries did not seem to understand that they had the power to take action in cases of corruption, and suggested that the National Treasury should step in to assist.  He also urged the joint committees to ensure that the Supply Chain Management proposals, currently open for public comment, aligned preferential alignment with the aims of  Broad-Based Black Economic Empowerment (BBBEE).

The meeting was adjourned.