2015 Revised Fiscal Framework and Revenue Proposals (MTBPS): public hearings

Meeting report

Introduction by the Chairperson
Mr Y Carrim, Finance Standing Committee Chairperson, noted that there had been advertising in the public domain for these hearings, in several languages. Mr De Beer, had asked that he (Mr Carrim) assume primary responsibility for the meeting. Mr De Beer would assume responsibility for public hearings on the budget, in the first quarter of the following year.

Mr C De Beer, Chairperson of the Finance Select Committee, noted that there were three Members of the Finance Select Committee present. The Members of the Finance and Appropriation Select Committees were the same, except for the chairpersons. Three Members were in the Appropriations Select Committee at that moment, receiving inputs from the Financial and Fiscal Commission (FFC). They and the FFC would join the meeting later on. The public hearings were an exercise in public participation. Stakeholder inputs about the Medium Term Budget Policy Statement (MTBPS) had to set the tone for the following year’s budget.

FEDUSA submission on the MTBPS
Mr Dennis George, FEDUSA General Secretary, said the economic projection that the economy was set to grow by 1.5% in 2015, 1.7% in 2016 and 2.6% in 2017, was far below the three scenarios illustrated in the National Development Plan (NDP). That had severe implications for inclusive economic growth for job creation. The 2015 MTBPS was delivered against a background of a global storm of diminishing growth, depressed commodity prices, low investments and high youth unemployment. FEDUSA would work side by side with government and business to create more decent work and entrepreneurial opportunities for unemployed young people, through addressing the most binding constraints to inclusive economic growth. The number of State owned enterprises (SOEs) had to be rationalised. Legislation had to address an innovative approach to funding. Labour market reforms were needed to avoid protracted violent strikes. There had to be investment opportunities for independent power producers to expand energy infrastructure. A number of SOEs had large borrowing requirements and it fell to taxpayers to bail them out.

Government had to manage growing public debt to prevent exposing the economy to shocks that could compromise faster economic growth over the long term. The federation was in favour of allocations to the Expanded Public Works Programme (EPWP) and the Community Work Programme (CWP). FEDUSA commended government for prioritising the stabilisation of debt as a share of GDP. FEDUSA did not agree that improved compensation for public servants meant that there was no room for expanding government employment. FEDUSA supported the principles of harmonisation of the retirement reform process concerning membership of provident funds. The Minister of Finance was called upon to implement the retirement reform process in the 2016 financial year.

Ilifa Abantwana submission on the MTBPS
Ms Svetlana Doneva, Communications Manager, noted that Ilifa is a national programme, initiated and supported by a donor partnership that aims to secure public provision of Early Child Development (ECD) services for all children, with a focus on the poorest 40% of children under the age of six years. ECD was viewed as central to national developmental goals, as it could develop human capital towards breaking the chains of intergenerational transmission of poverty. The Department of Performance Monitoring and Evaluation (DPME) commissioned an ECD diagnostic in 2013 to assess whether the national ECD system met developmental criteria. The national system was found to be inadequate, as it excluded the majority of children in the poorest and most underserviced communities. The quality of early learning and care services for the most marginalised and vulnerable children was poor. The diagnostic identified the inadequacy of a funding framework for ECD. It failed to support non-centre based care and home based programmes. Ilifa welcomed MTBPS prioritisation and allocation of additional resources towards strengthening Grade R. However, there was concern about the MTBPS being too limited in its focus. The MTBPS had to reflect the shift in the resourcing framework necessary to support the emerging national ECD system that had to build human capital from the bottom up.

Rural Health Advocacy Project submission on the MTBPS
Mr Daygan Eagar, Programme Manager, said RHAP’s interest in the MTBPS stemmed from its work on health care financing and rural health. Over the preceding two years there had been an increasing occurrence of staffing moratoria or the freezing of posts implemented at the provincial level. Budgets were often insufficient to sustain current staffing levels. To control overspending and cost pressures that emerged from higher than inflation increases to compensation of employees ( CoE), provincial health departments and treasuries started implementing staffing moratoria or the freezing of posts. The situation could become worse over the 2016/17 to 2018/19 MTEF. Health budgets increased beyond inflation but were insufficient to meet growing cost pressures. RHAP was concerned that austerity measures could have catastrophic consequences for health care. There could be diminished capacity to deliver services, with overburdened staff leaving the public service. RHAP recommended that the National Department of Health collaborate with Treasury to provide guidance through policy on how provinces were expected to protect critical posts in times of austerity. Consequences for patient care had to be the determining factor to decide which posts were critical under the circumstances. Districts had to develop costed recruitment plans. Corruption and unauthorised expenditure had to be performance managed, instead of punishing managers for the transgressions of others. Frozen posts had particularly severe consequences for rural facilities, which were generally already understaffed.

Discussion
Mr D Van Rooyen (ANC) asked Ilifa Abantwana to what extent the MTBPS did not support the emerging ECD priorities. Home and community based programmes were well known as regard to matters like health, but for ECD it was a new concept. He asked to what extent the budget provided for non-centre and home based programmes.

Mr D Maynier (DA) noted that FEDUSA was concerned about accessing the cash balance in the skills levy. He asked what FEDUSA's argument for this was. There had to be additional information and motivation.

Mr Maynier asked Ilifa Abantwana about the cost implications of its proposal over the MTEF.

Mr Maynier referred to the Rural Health Advocacy Project statement that the public sector wage bill consumed too much as percentage of government expenditure. It was highly important to consider the blanket moratorium on service delivery. Treasury had mentioned that 12 000 civil servants had left. Those were, among others, frontline public servants like doctors, nurses and teachers.

Mr Van Rooyen commented on the perennial problem of youth unemployment, alluded to by FEDUSA. There were interventions, notably in the form of the tax exemption initiative. There have been critical voices about that intervention. He asked if FEDUSA wanted that kind of intervention, and would want to have it reinforced.

The Chairperson said FEDUSA was in fact calling for a new compact. He asked what would be different about it. It's embarrassing. There have been all these accords but very little has been implemented. Parliament was not doing its job of oversight, the Executive was not doing its job. So what is new? He agreed that there had to be a new compact but it had to be a new form of it. There had to be a modest, phased approach with short and long term goals. Otherwise it becomes symbolic. Secondly, he referred to legislation for State Owned Enterprises. The majority of the Committees would agree to this being implemented. On minimum wage, it too agreed.

The Chairperson told Ilifa Labantwana that it was preaching to the converted. The importance of ECD was well known, and the reasons for this could be encountered in first year psychology or sociology courses. If the money was there, whatever needed to be done had simply to be done. There was empathy and agreement on the part of Parliament, but still Ilifa was overstating its case. The question was where was the money? He advised that Treasury peruse the Ilifa Abantwana documents. The Committees would also look at it, and the Director General. Ilifa and RHAP had to say how, given the concerns, if the things that they advised could be done. He advised that the two entities engage with the Portfolio Committees of Social Development and Basic Education, and the DPME. The respective portfolios had to be lobbied. Then the Ministers and Directors General had to lobby Treasury. Society had to be lobbied as well, to make people aware. With reference to the ECD non-centre approach, he remarked that 50% of all families in South Africa were fatherless. It was stunning. He asked what the prospects for reducing inequality were, under those circumstances. The two entities had to submit pithy summaries of what they thought Parliament had to include in its report. Parliament had to be able to say that certain recommendations had to receive immediate Treasury attention, others later, and others not at all.

The Chairperson continued that the Rural Health Advocacy Project likewise had to lobby the Department of Health. The provincial portfolio committee on health had to be engaged, and the provincial finance committee.

Mr De Beer noted that the Select Committees on Finance and Appropriation met to monitor the fiscal position of provinces. He welcomed the entities to meet with provincial departments, and to network with provincial legislators.

Mr Maynier remarked that the RHAP submission had touched on a point that went beyond health. The question was how to protect critical posts, whilst at the same time the public service wage bill had to be contained. It was a transversal issue that the Committee had to deal with.

The Chairperson told Mr Maynier that the increased public service wage bill was a fact. Even the Minister of Finance and some ANC members had reservations about it. Yet it remained a fact that had to be accepted.

Ms Doneva responded with reference to the non-centre approach to ECD. The centres consisted of crèches and daycare centres, assisted by the Department of Social Development. If more than six children were cared for, a grant could be received. The non-centre approach was community based, and included actions like going from door to door to visit pregnant women, and forming early learning playgroups. Churches and town halls could be used. The Department of Cooperative Governance and Traditional Affairs (COGTA) assisted with training of community workers. Poor and marginalised people were prioritised. Ilifa worked with Treasury at the national level on a costing programme. Education had to be a main priority for government.

The Chairperson replied that Illifa had to give the Committees something more concrete. The Committees wanted to know how much money Ilifa thought it should get. Parliament would not abandon Ilifa. He told Ilifa not to despair, and to lobby everyone, including the Appropriations Standing Committee.

Mr Eagar responded that they had met with the provincial Treasury and the Department of Health in the previous week to discuss provincial HR management. Issues were legitimised. It was more a matter of protecting critical posts than of asking for more money. The role of Treasury was to prioritise. There was R150 billion in the Unemployment Insurance Fund (UIF). The unions did not like the idea but the money could be utilised elsewhere. Other forms of social protection had to be thought of. He realised that he was being contentious.

The Chairperson told Mr Eagar that he was not being contentious. Treasury itself had raised the matter.

Mr George replied with reference to accessing the balance of the skills levy, that it could not be spent because it was dedicated and ring-fenced. FEDUSA was not in favour of sitting on a huge amount of money in the UIF. But it was also a dedicated fund. Workers had contributed 50 percent to it. Money could not simply be given to universities. Management had to come up with a plan. FEDUSA was opposed to outsourcing. People had to be employed in decent jobs. The employment tax incentive gave a tax credit to employers. It had created 270 000 new jobs. The programme would be reviewed in 2016. By then there would be evidence needed for a programme to address structural unemployment. It was crucial to address binding constraints that held the economy back. It had to start with rural development, which had to be speeded up. There had to be policies to look at constraints. There had to be inclusive growth to benefit those who did not benefit in the past. Black people and women had to be brought into the economy.

School of Economic and Business Sciences at Witwatersrand University submission on the MTBPS
Prof Jannie Rossouw, Head, said that a fiscal cliff would occur at the point where social grant expenditure and civil service remuneration would absorb all government revenue. South Africa could move from a fiscal cliff to a fiscal plateau if populist choices could be avoided. Social grants comprised about 12% of total government spending. It amounted to an annual increase of 9.9% since the 2007/08 fiscal year. Old age pension and child grants placed additional burdens on the fiscus. Civil service remuneration increased on average by 13.1% per annum since 2008. A general annual increase in remuneration was coupled with an increase in staff numbers. Among 17 emerging economies tabled, South Africa was second only to Argentina in terms of civil service remuneration as percentage of the GDP. Critical rethinking of spending priorities was necessary. He suggested that government and politicians use exclusively vehicles manufactured in South Africa. Increased taxation on income above R1 million was preferable to wealth tax. An affordability issue arose where people owned valuable property, but had a low income. Currently the maximum marginal tax rate of 41% was payable on taxable income exceeding R701301. Increased tax rates above that income level would increase revenue for government. Free education at tertiary level would cost some R33 billion per annum. R6.82 billion could be gathered from extra tax brackets.

Prof Rossouw again advised that “government and politicians” use only locally manufactured vehicles. A list of such vehicles was provided. He concluded his presentation with the polemical remark that such vehicles could be painted black, so that other road users could still be intimidated. This remark, added to some forthright criticisms of the Zuma administration, led to a mild uproar.

The Chairperson told Prof Rossouw that although his tone was provocative, the Committee was not rigid, and prepared to entertain challenging views. The professor had to remember that he was inflaming people’s passions.

Prof Rossouw replied that he liked debate. He referred to the South African Customs Union (SACU) payments of R51 billion to Botswana, Lesotho, Namibia and Swaziland. The situation had to be relooked at. One percent of the GDP was being paid as development aid. The country could no longer afford to do that.

COSATU submission on the MTBPS
Mr Matthew Parks, Parliamentary Officer, said that whilst COSATU welcomed certain aspects of the MTBPS, there was deep concern about Treasury’s perceived failure to abandon a conservative fiscal and monetary approach. There was a call for radical policy interventions to address unemployment, deepening poverty and growing inequality. COSATU did not agree with reduction of state expenditure. The economy demanded increased state expenditure to expand infrastructure, support vulnerable industries and create decent permanent work for all. The economy could not afford to reduce the deficit as rapidly as planned by Treasury. COSATU was opposed to increased VAT and increased hikes in electricity and water tariffs. Tax avoidance by the wealthy and by companies had to be dealt with.

Government needed to confront the private sector on its reluctance to invest. Companies, built on local labour, were listed on foreign stock exchanges. COSATU felt that the MTBPS did not speak to the massive unemployment crisis. One out of three South Africans were unemployed. The public service wage bill was in line with international norms, and COSATU did not believe that the public service had grown out of size. In fact it had decreased by 12 000 over the previous year. It was recommended that the focus be on wiping out the large numbers of ghost employees. The massive wage gap within the public service had to be eradicated. CEOs and top management of SOEs paid themselves exorbitant salaries, only to retrench low paid workers when finances fell short. COSATU cautioned against privatisation or the stripping of state owned assets, with reference to ESKOM. Renewable energy was preferred to nuclear energy. There was concern about municipalities using the Expanded Public Works Programme (EPWP) and the Community Work Programme (CWP) as a form of cheap labour. Skills transfer through the programmes was questioned.
 
COSATU welcomed government efforts to assist emerging farmers and assist land reform and restitution, but much more needed to be done. Insufficient funds were allocated to such objectives.

Financial and Fiscal Commission (FFC) submission on the MTBPS
Mr Bongani Khumalo, Chairperson, and Dr Hammed Amusa, Programme Manager, presented. The Rand had depreciated since 2009, and there was a decline in gold exports. There was slow growth in the economies of South Africa’s trading partners. The deceleration in the growth of the Chinese economy had a knock-on effect on mining. There was a decline in the prices of platinum, gold, iron ore and coal. There were infrastructure bottlenecks and electricity supply constraints. The public debt to GDP ratio had grown to 45.7% from 43.7%. Government was committed to reducing debt costs. There were public sector wage bill challenges. Above inflation increases for public sector wages had wiped out the contingency reserve of R65 billion. Slow growth limited the labour surplus and there was a sharp drop in employment. Funding for the zero student fee increase was compromised by the public sector wage bill. The selling of non-strategic state assets could generate revenue. State funding for free education had to be reprioritised. The funding framework for universities had to be differentiated, and the funding model had to be reviewed. Government had to define what was meant by free education.

Discussion
Ms T Tobias (ANC) remarked that she wished there had been more time. She asked Prof Rossouw if he would accompany her to visit a sangoma in the townships. She had not commented on Prof Rossouw’s submission the previous year, as she wanted to understand his thinking. Prof Rossouw had been critical about presidential policy as if it was not the responsibility of the whole executive. Rightly he had to challenge the policies of the government and the whole of the executive. She referred to his statement that there had to be no adding to the recipients of grants. The statement had not been juxtaposed to population growth and unemployment statistics. Social grants were a form of immediate intervention. As unemployment grew, there were more potential recipients. South Africa was also an ageing society. Any view as a country had to be consolidated because the government had to address competing needs with limited resources. With regard to finding money, the private sector had to come to the party. If that was not forthcoming, arguing against wealth tax was not justified. The private sector had to come on board to assist with skilling and employment. It had not honoured its past commitments. Government wanted to improve corporate income tax (CIT) but companies said it was too much for them. Personal Income Tax (PIT) had been increased by 1%. No one agreed with that, not even Mr Maynier. The Davis Tax Commission suggestions had to be taken into account. VAT affected the poor and unemployed more than the wealthy. There had to be a compromise between PIT, CIT and VAT to increase tax revenue.

Mr Maynier asked if the 0% increase in student fees was to be addressed in the current year or not. If not, there was no need to adjust the current budget. The question was if relief would be needed at the beginning of the following academic year. He agreed with COSATU that front line services in the public sector had to be protected, but the public service wage bill was unsustainable. The question was how it could be contained over the MTEF.

Mr Maynier told the FFC that its view of the growth outlook seemed more consistent with the IMF than with that of the Treasury. The Committee had to decide about amending the revised fiscal framework. He asked if the FFC found debt levels and debt interest costs reasonable, and whether it was comfortable with the percentage of the GDP comprised by net debt.

Ms D Mahlangu (ANC) found the presentations informative. The SAA had recently appeared before the Committee. The entity foresaw job losses. The Committtee agreed about a living wage. She commended the FFC for highlighting issues and presenting options. She did not agree with the public hearing platform being used to accuse. Personal attacks were uncalled for. Solutions had to be presented.

Mr Van Rooyen commented that the R65 billion taken from the contingency reserve would impact on financial stability. There would be shrinking prospects to respond to future contingencies. The Committee had to learn from COSATU what the right level of the reserve had to be. He asked about the specific level that would be regarded as acceptable. He continued that the FFC had to advise on dealing with the fiscal challenge, also with regard to higher education. The process was currently unfolding. Constitutionally the FFC was one of the main structures to advise on the fiscal framework. He wished to state on a lighter note that he had planned to watch comedy over the weekend, but Prof Rossouw had entertained him very well.

Prof Rossouw conceded to the statement by Ms Tobias that he had to challenge policy, rather than the President. He was not opposed to an increase in the number of social grant beneficiaries, according to current definitions. The concern was that categories not be expanded, as in extending the upper age limit for children’s grants. He referred to expenditure reprioritisation. He agreed with COSATU about bling expenditure. He was not in favour of higher VAT. It was a regressive system for poor people. PIT could be increased for higher earners. Structures were already there. It would be expensive to build a system for wealth tax. Wealth tax would not contribute to closing the wage gap. Higher tax on those earning R1 million and above could contribute to closing the wage gap. The growth outlook was usually based on the full potential for GDP growth. It was always adjusted downward. There was no set of assumptions to support that growth could be ratcheted up to the 2.4% foreseen for 2017. Students registered in January or February but only received NSFAS money in April. There had to be agreement about whether money was going to be needed at the beginning of the next academic year.

Mr Parks replied with reference to the public service wage bill, that it was aligned to international norms. Unlike before 1994, government currently had to cater for 100% of the country. It would be better to eliminate ghost employees. Cuts to the police, education and health could not be made. There was too much growth in senior management numbers, and a shortage of nurses and teachers. Senior managers of parastatals were earning too much. There had to be a public service wage agreement. There was loss of jobs in SAA, and outsourcing and brokering in Telkom. There had to be interventions to ensure that parastatals follow government policies. The contingency reserve was there for droughts, floods and other emergencies. COSATU felt that the jump in the contingency reserve in the current year was too high. There had been a R45 billion jump. It was too high when unemployment was faced. R15 billion would suffice. The UIF surplus was tied up in investment funds. COSATU had wanted the R15 billion proceeding from the UIF holiday to assist the Industrial Development Corporation (IDC) with job creation, but the Treasury and labour had said that there was no capacity to spend the money.

Mr Khumalo responded that levels of non-core spending in higher education was not known. The FFC did not think according to government mode since 2010/11. Parliament did not have rules around debt levels and expenditure. The question with regard to fiscal consolidation after the counter-cyclical phase, was what had to happen on the revenue side. Growth rate had to be balanced with economic growth. The growth in public spending had to be linked to the growth path. The pace of borrowing was slowing down. The FFC had made recommendations with regard to education in 2011/12, which anticipated what eventually happened. It was pointed out then that fees were rising so rapidly that parents would not be able at some point to pay fees. At that point there was no response.

Mr Amusa said that he had used IMF figures to show the protracted slowdown of economic growth in South Africa, which was in line with all other projections.

Mr De Beer thanked all contributors. It had been an honour to engage with them. Debate was stimulated. Good government depended on spending money wisely. The Committees were accountable to their constituencies. The next joint meeting would be on Tuesday 3 November to deal with the report. The report would be tabled on the following 4 November.

Mr Maynier asked if there was to be a another meeting with Treasury about the MTBPS. The Treasury had to be written to, to advise about changes with respect to provisional contingencies. The current status of public sector borrowing had to be known.

The Chairperson said that Treasury had not responded to the MTBPS. Treasury had to reply to issues. He would write to the House Chairperson, to give Treasury a chance to have a say. There had to be engagement between the public, the Committee and Treasury, which would form the basis for the report.

Mr Maynier agreed that the Treasury had to respond. The Parliamentary Budget Office (PBO) had to say what criteria were used for the MTBPS assessment.

The Chairperson agreed that it was the right question to ask. It was in the Act that the majority party had shaped. The Money Bills Act would be looked at clause by clause early in the coming new year. Productivity of public sector workers left a lot to be desired. The case for the public sector wage bill was looking increasingly weak. Prof Rossouw’s opinion regarding curtailment of welfare allocations was unacceptable.

Finance Committee oversight report
Mr Van Rooyen commented that they should insert into the report that Cape Town was also visited, besides Durban. It had to be added that management of warehouses that stored illicit goods needed major improvement. A recommendation had to be added that there were unmanned gates that allowed illicit goods to come in. Gates had to be manned and hi-tech measures installed.

The Chairperson noted that such reports had to be submitted to him within two weeks of an oversight visit. The report had to be voted on two weeks after that. The oversight visit had been in June. It was unacceptable for it to be so late. The report was adopted.

Committee minutes
Minutes were adopted for 4, 5, 11,12,18, 19, 25 and 26 August; 1, 2, 8, 9 and 16 September. Members contested their absence recorded for meetings. The Chairperson replied that apologies had to be in writing.

The Chairperson adjourned the meeting.