ATC111115: Report on 2011 Medium Term Budget Policy Statement

Finance Standing Committee

Report of the Standing Committee on Finance on the 2011 Medium Term Budget Policy Statement, dated 15 November 2011

 

The Standing Committee on Finance, having considered the 2011 Medium Term Budget Policy Statement, reports as follows:

 

 

1. Introduction and Background

 

The Minister of Finance (the Minister) tabled the 2011 Medium Term Budget Policy Statement (MTBPS) before Parliament on 25 October 2011. In tabling the MTBPS, the Minister met his obligation under section 28 of the Public Finance Management Act 1 of 1999 (PFMA) that requires the Minister to table multi-year budget projections for revenue, expenditure and key macro-economic projections on an annual basis. In addition to that, the Minister also met his obligation under section 6(1) of the Money Bills Amendment Procedure and Related Matters Act 9 of 2009 (henceforth referred to as the Money Bills Act) that requires the Minister to submit to Parliament the MTBPS.

 

According to section 6(5) of the Money Bills Act, the Standing Committee on Finance and Select Committee on Finance (the Committees) must 30 days after the tabling of MTBPS report to the National Assembly (NA) and the National Council of Provinces (NCOP), respectively, on the proposed fiscal framework for the next three financial years. In line with section 6(2), the Committees report on a revised fiscal framework for the 2011/2012 financial year and the proposed fiscal framework for the following three years; and an explanation of the macro-economic and fiscal policy position, the macroeconomic projections and the assumptions underpinning the fiscal framework.

 

Following the tabling of the 2011 MTBPS and the engagement with the Minister, the Committees conducted public hearings on 01 November 2011, receiving submissions from a panel of organised labour and organised business. This report reflects the main themes emerging from the engagement with the Minister, organised labour and organised business. This report includes two main sections, namely: Economic Outlook and Policy, and Fiscal Trends and Policy. The former section gives an overview of economic outlook and policy with specific reference to key macro-economic indicators within the context of the current global economic environment. The latter section provides details of fiscal policy over the Medium Term Expenditure Framework (MTEF) with specific reference to the fiscal stance adopted by government.

 

 

 

2. The 2011 Medium Term Budget Policy Statement

 

The 2011 Medium Term Budget Policy Statement (MTBPS) was tabled in Parliament during the time when world economies were, and continue to face, slow economic growth and unresolved economic crisis. The state of the economy in the Euro zone and sluggish recovery in the United States poses a serious challenge to the South African economy and fiscus. According to the National Treasury, the main focus of the 2011 MTBPS is to provide the fiscal framework that will narrow the gap between spending and revenues while providing support to the economy. A budget deficit of 5.5 per cent of gross domestic product is expected in the 2011/12 financial year and should decline to 3.3 per cent in the 2014/15 financial year.

 

However, People’s Budget Coalition argues that focusing on deficit numbers is a conservative stance which is inconsistent with the scale of job losses that the economy has experienced. People’s Budget Coalition (PBC) indicated that it expected a macroeconomic policy framework that places job creation at the centre and to have adopted a targeted, expansionary fiscal stance supported by other macro-policy interventions such as management of exchange rate appreciations.

Over the medium term, public expenditure will be geared towards infrastructure investment and economic development. These measures will promote and strengthen industrial development and expand trade opportunities. It will further extend financial support for housing and urban infrastructure investment.

 

PBC notes with concern that the MTBPS calls for wage moderation in the public service and goes as far as to suggest that public sector wages constrain government from delivering basic services and infrastructure. They further argue that, whatever workers have gained continues to be eroded by job losses that stem from constrained real wage growth.

 

 

3. The Strength of the South African economy

 

Even though tax revenue collection has declined, South Africa is not alone in this challenge. At the least, South Africa falls within the countries which are considered to have protective measures to safeguard the uncertainties of the world economy. Amongst others, these are:

 

·         The adoption of the accommodative fiscal stance by government.

·         Ensuring and strengthening well capitalised financial institutions.

·         The well moderated government debt.

·         Allowing countercyclical fiscal and monetary stance to be pursued into the year ahead.

·         Government’s intervention when business activities are hit hard by the crisis.

·         The clear target with regards to the government debts levels and the anticipated decline by 2015.

 

Although South Africa is considered an emerging economy, it has shown some strength during though times of the world crisis.

 

4. The Possibilities of Shifting the Composition of Government Spending Towards Investments

 

Despite the fact that President Zuma had declared the year 2011 as a year of job creation, the economy continued to shed jobs in certain sectors. The increase in the household consumption is part of the economic growth injections that are required to stabilise economic growth. The government spending and support schemes to the unemployed as a result of the economic crisis has also boosted the economic status. Despite slow revenue collection, the economy has continued to expand due to these activities. The increase in the government wage bill, and the implementation of the Occupational Specific Dispensation (OSD) across the public sector, has contributed to an increase in household consumption.

 

These are short and medium term measures to keep the economic momentum. The long term measures are also important, and they can only be realised through long term projects like continued electricity generation capacity, public transport initiatives, investment in water supply and an integrated rural development strategy. Expanded Public Works Programmes (EPWP) also has played a major role in ensuring that people acquire some skills that enable them to make a living. According to the 2011 MTBPS, the private sector and government investments have declined since the year 2007. However, this should be reversed if South Africa is to witness economic growth and job creation.

 

According to Business Unity South Africa (BUSA), clarification of progress in respect of the implementation of the R9 billion jobs fund announced in the Budget speech earlier this year is welcome, as there has been an overwhelming interest from business in this regard. It reiterates its contention that this incentive should prioritise employment creation in the private sector, as this will be more productive in promoting employment throughout the economy over the medium and long terms.

 

 

5. Counter-cyclical Fiscal Policy

 

The 2011 MTBPS proposes a moderate expansion to the budget to support economic recovery and employment. Owing to exogenous factors, such as slowing growth in the global economy, the South African economy will see a lower than projected revenue in the 2011/12 and 2012/13 financial years.  The government therefore will experience a larger budget deficit, which is still in line with management of the fiscus. The economic support applied during the 2009 recession strengthened South Africa‘s safety net and support the return to growth. However, the 2011 MTBPS indicated that the expenditure required for this response has pushed up public debt as a proportion of Growth Domestic Product (GDP), thereby diminishing the available fiscal space.

 

According to BUSA, the counter-cyclical stance that the National Treasury adopted two years ahead of the global financial crisis has subsequently proven itself to have been a good decision. It has allowed South Africa to maintain spending on public works programmes, infrastructure and support schemes for companies in distress, as well as workers who lost employment. BUSA therefore continues to support this approach.

 

In light of the shifting spending to strengthen investment, the 2011 MTBPS highlights that the government will maintain its commitment to social expenditure in real terms. The government will support economic recovery by promoting competitiveness, continuing to invest in larger-scale investments in electricity, roads, rail and water.

 

 

6. Domestic Outlook and Macroeconomic Trends

 

The domestic conditions are largely supportive of economic growth. Real interest rates are low, which will enhance private sector investment. This leaves the banking sector in a well capitalised position to make upward movements. However, there is still a need for the manufacturing sector to experience a faster growth as the world economy improves over the medium term period. The manufacturing sector must be recapitalised in order to allow for sustainable economic recovery. Such sustainability would increase export demands, which requires structural improvements to the economy.

 

The Financial Fiscal Commission (FFC) is of the view that, given the revision in the economic growth figures for this year as well as the estimates for economic growth over the medium term, it is apparent that South Africa will need a much higher economic growth than the 7 per cent set out in the New Growth Path (NGP) document. FFC’s further argue that if the National Treasury’s estimates for 2012/13-2014/15 period materialise, the country will need an average growth rate of 8 to 9 per cent in the 2015/16-2020/21 period.

 

Table 1 (below) summarises the key macroeconomic projections inclusive of 2008 and 2014 calendar years.

 

Table 1: Macroeconomic Projections, 2008 - 2014

Calendar year	2008     2009         2010            Actual			2011 Estimate	2012       2013          2014 Forecast
Percentage change unless otherwise indicated
Final household consumption	2.2	-2.0	4.4	4.3	3.7	4.4	4.5
Final government consumption	4.7	4.8	4.6	4.4	4.1	4.1	4.1
Gross fixed capital formation	14.1	-2.2	-3.7	2.9	4.5	5.7	6.3
Gross domestic expenditure	3.4	-1.7	4.2	4.1	3.8	4.6	4.6
Exports	1.8	-19.5	4.5	4.0	6.9	7.1	8.0
Imports	1.5	-17.4	9.6	7.6	7.8	8.2	8.4
Real GDP growth	3.6	-1.7	2.8	3.1	3.4	4.1	4.3
GDP inflation	8.9	7.2	8.1	6.7	5.8	6.4	6.0
GDP at current prices (R billion)	2,274.1	2,396.0	2,664.3	2,931.8	3,2.8.2	3,555.0	3,930.5
Headline CPI inflation	9.9	7.1	4.3	5.0	4.7	5.6	5.4
Current account balance  (% of GDP)	-7.1	-4.1	-2.8	-3.4	-4.9	-4.0	-4.2

Source: National Treasury (2011)

 

 

6.1 Factors Affecting Domestic Outlook:

 

The following are factors that affect domestic economic outlook:

 

·         Stagnating global growth would reduce South Africa’s exports.

·         Capital flows reversal could lead to weaker equities prices on the Johannesburg Stock exchange, and

·         A weakening in emerging markets; especially China could put downwards pressure on commodity prices and reduce the profitability of mining.

 

Although the real GDP growth has experienced a positive increase by 2.8 since 2010 and projected at 4.3 in 2014, this level of increase is made up of increasing trends in exports which need to be sustained in the long term. On the other hand, the imports demand remained higher than the exports demand. While exports demand is projected to increase from 4.5 per cent in 2010 to 8.0 per cent in 2014, imports levels are already high with the projections of 9.6 per cent in 2010 to 8.4 per cent in 2014. Exports demand was also hampered by the underperforming mining sector which exports a lot of products. The gross fixed capital formation has only projected to grow by 2.9 per cent in 2011 to 6.3 per cent in 2014.

 

The inflationary pressures remain contained, and the consumer price inflation has remained within the range of 3 to 6 per cent for 20 months, and is expected to grow up to an average of 5 per cent in 2011. The R25 billion which will be introduced for the next six years for a range of interventions, such as invigorating industrial development zones, assisting enterprise investment and job creation, and offer support to the transition to a greener economy, leverage infrastructure investment and risk sharing with private sector.

 

 

7. The 2011 Revised Fiscal Framework

 

7.1 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.

 

 

7.2 Expenditure

 

As indicated in section 7.1 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. 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).

 

Business Unity South Africa (BUSA) pointed out that it supports the MTBPS’ emphasis on the need to confront the challenges of growth, job creation and competitiveness and to bring about real structural change. It concur that this will be critical in promoting productive investment in key sectors of the economy in the current climate, not only insofar it concerns growth and expansion, but also as it relates to protecting workers and enterprises from the costs of the negative global economic situation.

 

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.

 

 

7.3 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 negatively. The projected tax revenue has increased over 2010/11 - 2012/13 period. 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.

 

FFC argues that, even though South Africa's government debt to GDP ratio is relatively low compared with that of advanced economies, it is projected to increase by a lot more than the corresponding public debt ratios of other developing countries, most notably India, Brazil,Mexico, Chile, Thailand and Poland. In addition, given that debt service costs are the fastest rising component of general government expenditure, adverse domestic and global conditions can make debt repayment difficult.

 

 

8. Conclusion and Recommendations

 

Having considered the 2011 MTBPS and conducted hearings on the 2011 MTBPS, the Standing Committee on Finance recommends that:

 

8.1 The National Treasury should present a detailed plan to the Committee on how it plans to change spending patterns from current consumption expenditure to productive spending.

 

8.2 The National Treasury should present a detailed plan to the Committee on the steps to be taken to reduce leakage from the public financial system.

 

8.3 The National Treasury should provide the Committee with a contingency plan in the event that macro-economic variables do not result as expected in the Revised Fiscal Framework.

 

8.4 The National Treasury and the South African Reserve Bank should take due care to ensure that the inflation rate remains in the target range of 3 to 6 per cent within the next three years.

 

8.5 The National Treasury should take all the necessary steps to ensure that the percentage of the state wage bill is brought back to under 40 per cent of GDP in the next three years.

 

8.6 The National Treasury should provide the Committee with a detailed plan on the following:

• Intergenerational Equity Policy,
• Countercyclical Fiscal Policy, and
• Debt Management Policy.

 

8.7 That the House accepts the 2011 Medium Term Budget Policy Statement.

 

9. Oral Submissions

 

Table (below) contains a list of people who made oral and/or written submissions before the Committees, some in their personal capacity.

 

Table 2: List of Submissions

Name	Position	Organisation
Mr. Pravin J. Gordhan	Minister of Finance	National Treasury
Mr. Nhlanhla Nene	Deputy Minister of Finance	National Treasury
Mr. Lungisa Fuzile	Director-General	National Treasury
Mr. Oupa Magashula	Commissioner	South African Revenue Services
Mr. Kenneth Brown	Deputy Director-General: Intergovernmental relations	National Treasury
Mr. Andrew Donaldson	Deputy Director-General: Public Finances	National Treasury
Prof. Raymond Parsons	Deputy Chief Executive	Business Unity South Africa
Ms. Prakashnee Govender	Parliamentary Officer	People’s Budget Coalition
Mr. Bongani Khumalo	Acting: Chairperson	Financial and Fiscal Commission

 

The written submissions by the above-mentioned organisations are available on request from the Committee Secretariat.

 

10. References

 

BUSA, (2011), Medium Term Budget Policy Statement: Presentation to the Standing and Select Committee’s on Finance, Cape Town, 01 November 2011.

 

FFC, (2011), Financial and Fiscal Commission: Submission on the 2011 Medium Term Budget Policy Statement, Cape Town, 01 November 2011.

 

Gordhan, P. (2011), Medium Term Budget Policy Statement 2011’s Speech, Parliament of RSA, Cape Town, 25 October 2011.

 

National Treasury, (2011) Medium Term Budget Policy Statement, Pretoria: Government Printers.

 

PBC, (2011), Submission of the People’s Budget Coalition to the Standing Committee on Finance and Select Committee on Finance on the Medium Term Budget Policy Statement, dated 01 November 2011.

 

 

 

Report to be considered.