Report of the Standing Committee on Finance on the 2010 Revised Fiscal Framework, dated 29 October 2010

The Standing Committee on Finance, having considered the 2010 Revised Fiscal Framework, reports as follows:

1. Introduction

Section 12(3) of the Money Bills Amendment Procedure and Related Matters Act, Act No. 9 of 2009 (the Money Bills Act) requires that the Minister of Finance tables a revised fiscal framework with the national adjustments budget if the adjustments budget effects changes to the fiscal framework.

Section 12(5) of the Money Bills Act further requires that the revised fiscal framework be referred to a joint sitting of the Committees on Finance for consideration and reporting.

The 2010 revised fiscal framework was tabled in the National Assembly of Parliament by the Minister of Finance, on 27 October 2010 and the National Assembly referred it to the Standing Committee on Finance on the same day. The Standing Committee on Finance and the Select Committee on Finance conducted, on 29 October 2010, a joint meeting to consider the revised fiscal framework.

2. Committee’s Observations

The Standing Committee on Finance (the Committee) noted that the consolidated government deficit is projected to decrease from 6.3 per cent of the gross domestic product (GDP) in the 2010/11 financial year to 3.2 per cent of GDP in the 2013/14 financial year. The projected reduction in government deficit was driven, amongst other things, by the strong uptake in revenue and the stabilization in non-interest spending. National Treasury indicated that growth in expenditure will need to moderate as debt service costs increase over the Medium Term Expenditure Framework (MTEF). National Treasury undertook to continue to pursue a counter-cyclical fiscal policy that will aim to grow revenues while gradually reducing non-interest stimulus spending. It is however important to keep the fiscal trajectory on a sustainable path while meeting growth expectations.

The Committee noted that revenue, as a percentage of GDP, is increasing at a rate of 0.2 per cent per year over the next three years (that is 28.7, 28.9 and 29.1 per cent in the 2011/12, 2012/13 and 2013/14 financial years, respectively). In the same period, expenditure is declining at a rate of 0.4, 0.5 and 0.5, per cent respectively. As revenue increases and expenditure decreases, the budget will remain in deficit albeit declining, until the 2018/19 financial year.

Over the MTEF period, government departments are requested to reprioritise programmes in order to be efficient and effective. In view of the 2010 audit outcomes by the Auditor General on various government departments, this calls for more stringent control measures on expenditure and prudent financial management.

The Committee recognizes that the Southern Africa Customs Union’s (SACU) revenue sharing formula is currently under review and that the SACU’s Council will meet in December 2010 to resolve this matter. The Committee accepts that this revision should be done carefully and without jeopardizing the economic stability in the Botswana, Lesotho, Namibia and Swaziland (BLNS) countries. The Committee advises that the revenue sharing formula should be favourable towards the South African fiscal burden in order to support South Africa’s ability to boost revenue collection, and consequently increase revenue as a percentage of GDP in the fiscal framework until 2013/14.

The Committee noted that, over the long term, higher economic growth will support debt reduction, enabling government to rebuild the fiscal space.

The Committee noted that the 2010 Medium Term Budget Policy Statement (MTBPS) estimated that the debt amount will be approximately 40 per cent of GDP in the 2015/16 financial year. If the economy experiences another recession and the level of debt is as projected in the 2015/16 financial year, the Committee foresees major challenges. While the MTBPS indicated that the exact level of debt will largely depend on the pace of economic growth, the Committee is of the view that there is still an element of economic uncertainty. The Committee however fully endorses the fact that the economy is currently in a solid position.

3. Conclusion

The Committee would like to commend National Treasury that South Africa scored first in the world in the survey of budget transparency of the International Budget Partnership. This achievement results from years of commitment to the reform of the budget system towards greater transparency and greater potential for accountability and participation.

4. Recommendations

Having considered the revised fiscal framework, the Standing Committee on Finance recommends the following:

4.1 That National Treasury should take appropriate steps to accelerate the rate of decline in expenditure.

4.2 That National Treasury should provide the Committee with a detailed report on how government would rebuild the fiscal space.

4.2 That National Treasury should provide the Committee with a detailed report on the impact of a zero rating value added tax (VAT) on books on the fiscal framework.

4.3 That National Treasury should resolve issues pertaining to the SACU’s revenue sharing formula as a matter of urgency.

4.3 That the House accepts the Revised Fiscal Framework.

Report to be considered.