ATC111104: Report on 2011 Revised Fiscal Framework, dated 04 November 2011

Finance Standing Committee

Report of the Standing Committee on Finance on the 2011 Revised Fiscal Framework, dated 04 November 2011

 

The Standing Committee on Finance, having considered the 2011 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. Furthermore, section 12(5) of the Money Bills Act requires that the revised fiscal framework be referred to a joint sitting of the Committees on Finance for consideration and report.

 

The 2011 revised fiscal framework, as part of the 2011 Medium Term Budget Policy Statement (MTBPS), was tabled in the National Assembly of Parliament by the Minister of Finance on 25 October 2011.  The Standing and Select Committees on Finance (the Committees) invited public submissions using print media. The following stakeholders made their submission to the Committees: Financial and Fiscal Commission (FFC), Business Unity South Africa (BUSA), and People’s Budget Coalition (PBC).

 

2. The 2011 Revised Fiscal Framework

 

2.1 Revenue

 

The 2011 MTBPS indicates that in the 2007/08 financial year, gross revenue tax increased by 15.6 per cent, reflecting strong economic conditions. This rate of increase slowed during the 2008/09 financial year to 9.1 per cent. Following the recession in 2009, gross tax revenue declined by 4.2 per cent. This highlighted the fact that tax revenue responds to changes in the economic cycle. A sharp fall in Corporate Income Tax (CIT), Value Added Tax (VAT), Secondary Tax on Companies (STC) and customs duty revenue led to this decline. However, the conditions improved during the 2010/11 financial year, whereby nominal gross tax revenue grew by 12.6 per cent on a year-on-year comparison basis -with significant increases in Personal Income Tax (PIT), VAT and, customs duty and fuel levy revenues.

 

The projected revised estimates of the total tax revenue for the 2011/12 financial year amounts to R728.6 billion, while the total budget revenue amount to R814.2 billion. The PIT, CIT and VAT make up 34.7 per cent, 19.8 per cent, and 25.7 per cent, respectively, of the total tax revenue. The gross tax revenue is projected to increase by 8.1 per cent in nominal terms during the 2011/12 financial year. Compared to the 2011 National Budget‘s estimates, the estimated gross tax revenue is revised downward by R13.0 billion to R728.6 billion. The 2011 MTBPS indicates that this has been mainly as a result of downward revision of VAT receipts to R187.5 billion. Furthermore, the revenue collection for the 2011/12 financial year and the forecast for the 2012/13 financial year reflect weaker economic conditions. The overall budget has been revised downwards by R10.3 billion in the 2011/12 financial year and by R18.8 billion in the 2012/13 financial year.

 

2.2 Expenditure

 

As indicated in section 2.1 above, the projected revenue for the 2011/12 financial year amounts to R814.2 billion, which is 7.4 per cent higher compared to the 2010/11 outcome of R758.4 billion and 27.3 per cent as a percentage of 2011/12 gross domestic product (GDP). The 2011/12 government expenditure is projected to amount to R978.8 billion. Therefore, the expenditure is projected to exceed revenue by R164.6 billion -creating a budget deficit of 5.5 per cent as a percentage of GDP. The government debt cost is projected to rise to R76.9 billion, which is 2.6 per cent of GDP and 7.9 per cent of the total projected expenditure. Nevertheless, the consolidated budget deficit is projected, in the medium term, to decrease from 5.5 per cent in the 2011/12 financial year to 3.3 per cent in the 2014/15 financial year.

 

According to the 2011 MTBPS, government spending will continue to grow moderately in real terms. The proposed fiscal framework makes R1.1 trillion available for spending in the 2012/13 financial year in order to support key spending priorities including: job creation, maintain the real value of the social wage, and support economic transformation along the New Growth Path (NGP).

 

The 2011 MTBPS stipulates that, over the Medium Term Expenditure Framework (MTEF) period, national departments and public entities must reprioritise and realign their budget baselines to use resources more effectively. The focus, amongst other things, will be on investment in new buildings and fixed structures, as well as maintenance of existing structures.

 

The budget for public sector infrastructure is projected to be R232.9 billion for the 2011/12 financial year, which consists of the following: economic services to the amount of R197.3 billion; social services amounting to R26.6 billion; central government and administrative services amounting to R4.2 billion; justice and protection services amounting to R4.1 billion; and financial services amounting to R0.7 billion. A projected R71 billion will be spent on health and education infrastructure over the MTEF period; and more specifically with education estimated to spend R32.2 billion and health R38.8 billion.

 

2.3 Debt Financing

 

In the 2011 MTBPS, it was reported that the South African bond market, which will be the primary source of financing over the medium term, remains liquid. The debt issuance over the medium term will be maintained at existing levels by drawing on cash balances and exchanging debt maturing within the next few years for debt with a longer term to maturity. The total net loan debt is projected to amount to R1.006 trillion in the 2011/12 financial year.

 

While revenue, as a percentage to GDP, has declined when compared to the previous years, government spending has been increasing on the other hand. This is indicative of the fact that part of the amount spent by government during this period has been borrowed. This is indicated by the budget deficit which started increasing from the 2010/11 financial year until the 2012/13 financial year. The increase in the budget deficit may actually cause the government to borrow more in order to finance the deficit. This move is likely to affect the future generation to come negatively. The projected tax revenue has increased between 2010/11 until 2012/13. However, revenue, as a percentage of the GDP, has declined quite drastically over the same period. In the 2011/12 financial year, the budget deficit, as a percentage of the GDP, is projected to be 5.5 per cent -increasing from 4.6 per cent in the 2010/11 financial year. The increase in the budget deficit is as a result of borrowings because revenue is less than spending. Furthermore, state debt costs are the fastest growing expenditure component in government spending, followed by spending on infrastructure.

 

The proposed increase in government expenditure on education, social protection, local government and, housing and health services does not include rural development as part of government’s policy priorities.

 

3. Committee Observations

 

Having considered the 2011 MTBPS and public submissions, the Committees observed the following:

 

• The 2011 MTBPS sets out a fiscal framework that is projected to narrow the gap between government spending and revenue, while providing support to the economy and strengthening infrastructure investment for sustainable long-term growth. National Treasury indicated that South Africa’s financial institutions are well capitalized and government debt is moderate as compared with European countries, and that slower economic growth, falling tax revenue and uncertain financial conditions confront many of South Africa’s trading partners and other developing economies;

 

• The GDP growth is lower than the 2011 National Budget forecast and is expected to remain moderate; it is thus expected to be 3.1 per cent in the 2011/12 financial year and 3.4 per cent in the 2012/13 financial year. Furthermore, the Committees observed that revenue collection has not yet recovered and the economic outlook is uncertain. The deficit of 5.5 per cent of GDP projected for this year, moderating at about 3.3 per cent over the MTEF;

 

• Government debt is projected to stabilize to approximately 40 per cent of the GDP in the 2015/16 financial year;

 

• The Committee observed with concern the increase in the State Wage Bill  from 31 to 42 per cent in the previous four-year period.  This is a concern for the Committees on Finance since this has resulted in higher cost of production and low growth in job creation;

 

• Government has been the main employer and there is a need for a firm commitment by the business sector with regard to job creation in order to realize the ultimate goal of creating 5 million jobs by 2020;

 

• Young people and the less skilled have yet to see economic recovery translate into jobs, which does not address government priorities on the creation of decent work and sustainable livelihoods;

 

• The Committee welcomes the allocations of the R25 billion increase to the economic stimulus;

 

• Under-spending on infrastructure has been an ongoing problem and the key challenge has been the shortage of relevant skills; and

 

• A shift in government expenditure is welcome and more emphasis should be on bulk infrastructure development.

 

Given these observations, the Committees report as follows:

• There is a need for savings by all government departments, with a need to focus on the composition of spending and addressing inefficiency, extravagance and waste. The Committee further expressed its support on the comment made by the Minister of Finance that government departments need to identify and report on savings initiatives;
• There is a further need to ensure that Parliament plays an effective oversight over the executive in order to improve operational and financial excellence in government departments and its entities; and
• The Fiscal Framework must be aligned to the New Growth Path (NGP) among other objectives.

 

4. Conclusion

 

Fiscal policy will support the recovery by allowing the deficit to widen in the short term, and government will implement a series of measures to support economic growth and competitiveness.

 

Over the medium term, government spending continues to grow, but at a more moderate pace than in most recent years. Over the longer term, government will reduce debt and restore sustainability. To consider more rigorously the intergenerational consequences of government’s revenue and spending choices, the Committees are looking forward to National Treasury publishing the long-term fiscal report in 2012.

 

5. Recommendations

 

Having considered the revised fiscal framework and public submissions in accordance with sections 59 and 72 of the Constitution, the Standing Committee on Finance recommends as follows:

 

5.1               National Treasury should launch a campaign to educate the nation about the importance of saving and the broad implication both on their lives and the economy in general;

 

5.2   More support, including relaxation and/or reviewing of constraining laws should be given to small business enterprises to create jobs;

 

5.3   National Treasury should expedite infrastructural development through partnerships with the private sector. These partnerships will also require the review of the Public Private Partnerships (PPP’s) in its current form;

 

5.4   National Treasury and Parliament Committees should place greater emphasis on budget performance to achieve the targeted growth rate;

 

5.5 Government wage bill and recurrent expenditure should be closely monitored, controlled and all stakeholders, particularly the unions, and National Economic Development and Labour Council (NEDLAC), be engaged to come up with a lasting and sustainable solution. The Committee supports the initiative by National Treasury to reduce the wage bill from 42 per cent to an acceptable ratio in the MTEF period;

 

5.6 National Treasury should intensify its monitoring of borrowed monies for infrastructure development, and ensure it is spent on infrastructure investment;

 

5.7 The proposed fiscal framework should take into account the need to shift

      the creation of economic activities to rural communities as part of the rural    

     development strategy;

 

5.8  The department of PW should ensure competitive pricing when entering to

       lease or rental agreements on behalf of the state, considering the inclusion

       of no cost escalation’ clause for the first three years of the lease term;

 

5.9  National Treasury should advise the Department of Public Works to minimise any escalation clauses in new building contracts and ensure that professional fees are negotiated down to the minimum level;

 

5.10 While growth is expected to pick up over the medium term, structural reforms are required to set the economy on a different trajectory that increases labour absorption, raises competitiveness and ensures that the benefits of growth are shared;

 

5.11 Government should ensure that fiscal support for lower wage employees and new entrants in the labour market is strengthened, including the introduction of the youth wage subsidy as announced by the Minister;

 

5.12 Community work programmes over the medium term should support low income households and bring more people into the labour market, and this should be strengthened;

 

      5.13 The Minister of Finance should provide the Committee with a detailed report on plans to eliminate wasteful and irregular expenditure from the public finance system; and

 

5.14 The House accepts the report on the 2011 Revised Fiscal Framework.

 

 

Report to be considered.