ATC140711: Report of the Standing Committee on Finance on the Strategic Plan and Annual Performance Plan of Budget Vote 10: National Treasury, dated 10 July 2014

REPORT OF THE STANDING COMMITTEE ON FINANCE ON THE STRATEGIC PLAN AND ANNUAL PERFORMANCE PLAN OF BUDGET VOTE 10: NATIONAL TREASURY, DATED 10 JULY 2014.
The Standing Committee on Finance, having considered Budget Vote 10: National Treasury, its Strategic and Annual Performance Plans for the 2014/15 – 2018/19 period, reports as follows:

1. Introduction

Budget Vote 10, which comprises the National Treasury and the South African Revenue Service, was referred to the Standing Committee on Finance on 25 June 2014. On 2 July, the Minister of Finance, the Director-General, the Acting Commissioner and senior officials of both the National Treasury and South African Revenue Service (SARS) appeared before the Committee to discuss Budget Vote 10 and the updated Strategic and Annual Performance Plans. This report presents the Committee’s deliberations with the National Treasury and the SARS.

The consideration of the budget and the processing of the report have been finalised in exceptional circumstances, due mainly to the dates of the general elections and convening of the 5 ^th term of parliament. The onerous legal and other deadlines for the adoption of the overall budget by parliament meant that the Committee has had to process the Department’s budget very quickly. Moreover, the Committee has just been constituted, with almost all new members, and is still finding its feet, as it were. There has not been the time or space to engage sufficiently with key stakeholders and the public on the budget. The Committee has, in the circumstances, not been able to be as rigorous and effective as it would have liked to have been in processing the budget. The Committee will certainly be more rigorous in its consideration of the Department’s budget next year, and will in different ways and forms in the period leading to then, engage with the National Treasury and the institutions that fall within its portfolio on matters related to their budget for this financial year.

2. Overview by the Minister

The Minister of Finance, Mr Nhanhla Nene, emphasised to the Committee that the economy was growing at a moderate pace and performing below expectations. The projected growth rate figure would be issued when the Medium Term Budget Policy Statement (MTBPS) is tabled in October 2014. The budget was aligned with the National Development Plan (NDP) and the country was entering a new 20 year phase of development. South Africa had to grow faster in order to improve the conditions of the poor and reduce poverty. The Minister said that despite the challenging circumstances SARS stood to collect R1 trillion during this tax season.

3. Mandate of the National Treasury

The National Treasury derives its mandate from Chapter 13 of the Constitution of the Republic of South Africa. According to section 216 (1) of the Constitution, national legislation must establish a National Treasury and prescribe measures to ensure both transparency and expenditure controls in each sphere of government. The functions and powers of the National Treasury are contained in Chapter 2 of the Public Finance Management Act (PFMA).

The strategic goals of the Department are set out in its plan for realising its mandate over the medium term and structure its programmes. The goals are to:

· Prepare, finance, publish and monitor the execution of the annual national budget to provide accurate and clear financial information and associated indicators of service delivery and performance;

· Improve techniques employed to monitor and analyse public expenditure by further refining applicable financial management frameworks and policies to ensure the appropriate use of available public financial resources for social and economic development, and infrastructure investment;

· Contribute to improved capacity in the areas of financial management and resource planning in government;

· Contribute to the development of a stable and robust financial sector that leads to continued economic stability and growth by continuing to monitor financial sector performance and developing financial sector policies and regulatory frameworks;

· Support infrastructure and urban development through various programmes including the Infrastructure Development Improvement Programme, the Neighbourhood Development Partnership Programme and the Cities Support Programme, amongst others;

· Promote public private partnerships as a financing alternative for development, where feasible; and

· Enhance supply chain management in government through the establishment of the Chief Procurement Office, which will provide a blueprint for addressing supply chain principles in order to reduce wastage and maximise value in the public sector.

To give effect to its strategic goals, the Department is structured into the following programmes:

• Administration - which provides leadership, strategic management and administrative support to the department ;
• Economic Policy, Tax, Financial Regulation and Research – which provides specialist policy research and analysis in the areas of macroeconomics, microeconomics, taxation, the financial sector, and regulatory reform ;
• Public Finance and Budget Management - which provides analysis and advice on fiscal policy and public finances, intergovernmental financial relations and expenditure planning and priorities. It manages the annual budget process and provides public finance management support ;
• Asset and Liability Management – which provides prudent management of government’s financial assets and liabilities ;
• Financial Systems and Accounting – which facilitates accountability, governance and oversight by promoting transparent, economic, efficient and effective management in respect of revenue, expenditure, assets and liabilities in the public sector;
• International Financial Relations – which manages South Africa’s multilateral financial relations with various stakeholders through various forums ;
• Civil and Military Pensions, Contributions to Funds and Other Benefits – which provides for non–contributory civil pensions, post-retirement medical contribution subsidies and other benefits for pensioners and their beneficiaries, administered on behalf of National Treasury through a Service Level Agreement with the Government Pensions Administration Agency (GPAA) ;
• Technical Support and Development Finance - which provides technical assistance on project and programme management, support for public-private partnerships, local government financial management assistance, funding of neighbourhood development projects and support for employment creation ;
• Revenue Administration – which comprises transfers made to the South African Revenue Service for purposes of undertaking core tax administration activities and maintaining the information technology competencies that support these operations. ; and
• Financial Intelligence and State Security – which provides for the allocation of funds to combat financial crimes, including money laundering and terror financing activities, and to gather intelligence for purposes of national security, defence and combating crime .

The Department directly contributes towards achievement of outcomes 4 ( Decent employment through inclusive economic growth); 6 (An efficient, competitive and responsive economic infrastructure network); 9 ( A responsive, accountable, effective and efficient local government system); 11 (Create a better South Africa and contribute to a better and safer Africa and world); and 12 (An efficient, effective and development oriented public service and an empowered, fair and inclusive citizenship).

4. Strategic Alignment

The National Treasury supports the aims of:

• The National Development Plan (NDP) as incorporated into other government plans;

• The Industrial Policy Action Plan (IPAP);

• New Growth Path (NGP);

• National infrastructure programme coordinated by the Presidential Infrastructure Coordinating Commission (PICC); and

• Government’s Outcomes approach.

5. Policy Priorities for 2013/14

According to National Treasury, in order for the objectives of the NDP to be realised, a stable and enabling macroeconomic platform is required to achieve sustainable growth and employment creation.

In his 2014 budget speech, the former Minister of Finance, Pravin Gordhan, stressed the importance of the NDP by stating that it “ reflects the priorities underpinning the 2014 budget, and prepares the ground for the next phase of our economic and social transformation ”. The Minister said that in order to make “ more rapid progress in creating jobs and reducing poverty, we have to grow our economy at 5 per cent a year or more ”.

National Treasury stresses the need to cut wasteful expenditure and drive efficiencies throughout all national departments to enforce the self-imposed debt ceilings. National Teasury believes that fiscal consolidation is well underway and it will be conducting regular spending reviews to examine programme performance and value-for-money.

In addition, the Minister stated that the introduction of regulations will strengthen the National Treasury’s oversight of public entities by requiring stronger compliance with reporting requirements for expenditure, revenue, borrowing and performance.

6. Economic Outlook

According to National Treasury, economic activity contracted in the first quarter of 2014, largely owing to protracted strike action. Confidence is low, which negatively affects consumption and investment in the short-run. Employment growth remains sluggish with 9 000 jobs created in the formal sector in the first quarter of 2014, according to the Quarterly Employment Survey (QES). Growth over the medium term is supported by an environment of stable macro economic conditions with interest rates at 30-year lows, public-sector capital investment, additional electricity-generating capacity and robust growth in Sub-Saharan Africa. Investment growth is expected to reach 6 per cent by 2017.

Public sector investment is expected to average annual growth of 4 per cent over next three years, with projected infrastructure investment of R827 billion over the medium term. South Africa’s financial markets are deep and liquid, enabling government to finance the bulk of its borrowing requirement in the domestic market. Foreign debt is low, as compared to international standards.

According to National Treasury, domestic risks to the economic outlook remain. There is an urgent need to reduce industrial actions in the economy and reinforce government communication to increase confidence. Further risks are delays to the introduction of infrastructure, high debt levels of consumers, and social tensions due to the slow pace of employment creation.

Gross Domestic Product (GDP) growth declined from 2.5 per cent in 2012 to 1.8 per cent in 2013 and is expected to increase to 2.7 per cent in 2014. National Treasury’s projections in the beginning of 2014 were that GDP would increase from 1.8 per cent to 3.5 per cent by 2016.

The economic outlook deteriorated and inflation edged upwards. The weakening currency, high inflation, and rising unemployment are causes for concern as they affect the overall economic outlook of the country. Consumer Price Inflation (CPI) increased from 5.2 per cent in 2012 to 6.1 per cent in 2013 and now stands at 6.6 per cent.

Debt-service costs are among the highest-growing expenditure items on the budget, reflecting a 6.85 per cent real growth rate from the 2013/14 financial year. Debt service costs are also R5 billion higher than projected, with contributing factors being the currency, inflation, and changes in the Repo rate.

The outcome of the wage negotiations could put pressure on the fiscus due to above-inflation wage settlements, particularly in view of current inflation figures. Deterioration in the economic outlook would require the government to consider additional expenditure and revenue measures to ensure fiscal sustainability.

The fiscal framework is built on a non-interest expenditure ceiling , set at the main budget level. The spending levels announced in the MTBPS are regarded as three year limits. This approach will ensure sustainability and predictability of fiscal policy. For the past two fiscal years, government has achieved the spending targets set by the ceiling. Ensuring sustainability will require continued adherence to the expenditure targets set out in the 2014 Budget.

7. South African Revenue Service

The mandate of SARS is contained in the South African Revenue Service Act (1997). The primary objectives of SARS are to collect all revenue due to the State, eliminate illegal trade and tax evasion, as well as to serve as the administrator of trade activity so as to support government’s developmental objectives.

The revenue collected by SARS is crucial in capacitating government to fulfil its policy priorities. The collection of legislated tax revenues can only be realised if SARS implements effective systems whereby it is easy to comply with tax legislation and avoidance and evasion is minimised. SARS fulfils a crucial role in ensuring that the objectives of the fiscal framework are realised.

SARS’s mandate is to ensure optimal compliance with tax and customs legislation. Such compliance must be achieved in a manner that does not unduly impede trade, economic growth and development by imposing an excessive and unfair administrative burden on taxpayers, traders and businesses. Moreover, compliance must be achieved in the most efficient and cost effective manner.

SARS’s ultimate goal is to support the NDP’s economic and social objectives by ensuring a sustainable revenue stream for government to meet its policy and delivery priorities.

SARS established four core outcomes that will serve as the foundation of all current and future organisational activities. These are increasing customs compliance; increasing tax compliance; increasing the ease and fairness of doing business with SARS; and increasing the cost effectiveness, internal efficiency and institutional respectability of its operations.

These four outcomes are interdependent and mutually reinforcing, as the pursuit of one enables the achievement of the other, for example, increasing cost effectiveness, internal efficiency and institutional respectability garners trust and confidence, which results in increased compliance (i.e. tax and customs) and ultimately leads to greater revenue collection.

There are many risks facing SARS with regard to achieving the four outcomes and ultimate goal of greater revenue collection:

· Growing illicit economic activities, which include smuggling, sale of contraband goods, and illegal immigration have a negative effect by eroding the formal tax base from which SARS can collect revenue tax;

· Perceptions of poor state service delivery and corruption negatively affects taxpayer’s attitude towards compliance;

· Businesses are increasingly using sophisticated and complex financial schemes to evade their tax obligations and minimise the impact of slow economic recovery on their profitability; and

· VAT fraud could increase as businesses try to protect their profitability in response to slow economic recovery.

SARS is actively addressing these risks by deploying officers to reach all current and potential taxpayers; carrying out outreach and education and other compliance activities; developing and procuring mobile registration kits to facilitate the registration of new taxpayers; increasing border control activities; and pursuing information exchange agreements and introducing regulatory and legislative reforms to counter tax avoidance schemes.

For the 2014/15 financial year, SARS received an allocation of R9.7 billion, up by R671.9 million or 7.5 per cent in nominal terms (or 1.2 per cent in real terms) from the previous year’s allocation of R9.0 billion. Over the medium-term, the budget is expected to increase at a nominal average rate of 6.1 per cent, reaching R10.8 billion by 2016/17.

SARS’s budget is divided among five programmes, with the bulk (i.e. R5.6 billion or 57.8 per cent) allocated to the Operation programme, followed by the Administration programme at R.1 billion or 32.3 per cent.

These two programmes are mainly concerned with rolling out importer and exporter solutions for clients that have preferred trader status; strengthening border control and intergovernmental coordination at border posts; and strengthening risk management in customs.

Almost two-thirds of the programmes spending is on compensation of employees, specifically on skills such as audit, information technology (IT), and tax administration specialists which are critical for SARS to deliver on its mandate. In instances where SARS lacks capacity, consultants are used for legal, auditing and IT related services, of which spending on consultants amounted to R238.2 million in 2013/14. As SARS intends building internal capacity in these areas, spending on consultants is expected to decrease to R205.9 million by 2016/17.

8 Committee’s Observations and Proposals

The Committee’s responses to the inputs from National Treasury and SARS are as follows:

8.1 The Committee welcomed the appointments of the new Minister and Deputy Minister and wished them well.

8.2 The Committee stressed that it was also in the interests of the executive that the Committee is active and effective in its oversight and other roles. This is particularly the case, given the major challenges being experienced in respect of economic growth, job-creation and development.

8.3 The Committee understands that it is an evolving process, but is keen to see greater synergy between the NDP, Strategic Plans and the allocation of budgets to departments. The Committee feels that National Treasury has a crucial role to play in this regard, and will be keenly monitoring this.

8.4 While welcoming National Treasury’s proposals on addressing the economic growth challenges, the Committee believes National Treasury needs to give more attention to the structural constraints to economic growth and job-creation. This has in any case been put firmly on the agenda by President Jacob Zuma in his references to the need for a more radical, second phase of the transition, with an emphasis on socio-economic transformation. There needs to be greater clarity on what radical structural transformation means and how it is to be given effect to.

8.5 The Committee noted the vacancy rates in the Department. However, Minister Nene suggested that it may well be that many of the vacancies need not be filled and suggested that the Committee might want to consider how effective the different programmes and the Department as a whole were rather than focus unduly on the vacancies. The Committee agreed with this.

8.6 The Committee expressed its concerns about the stresses placed on the national budget by the constant re-capitalisation of state-owned-entities and their inability to meet the goals they set for improvements in their financial position and capacity to deliver. The Committee feels that while recognising the important role of many of the SOEs to the country’s developmental goals, National Treasury needs to be more stringent in its engagement with the SOEs, even if they fall within the responsibility of other departments. The Committee requests National Treasury to brief it on the recapitalisation of SOCs, and if necessary, with appropriate representatives of the Department under which the relevant SOCs fall.

8.7 While recognising that SANRAL fell under the portfolio of the Ministry of Transport, the Committee feels that National Treasury needs to monitor its financial performance actively.

8.8 The Committee feels that National Treasury needs to work closer with the Department of Cooperative Governance to significantly improve the capacity of municipalities to spend the funds allocated to them from the national budget. The two departments also have to work together to monitor the financial performance of municipalities against the background of the NDP and the medium term strategic framework. The departments also need to contribute to ensuring that the Integrated Development Plans of municipalities are consistent with the NDP. It was also noted that while the Property Rates Act is administered by the Department of Cooperative Governance, National Treasury needs to work with that Department to ensure that the increasing number of people owning huge properties in rural areas are subject to rates.

8.9 The Committee noted that departments often rented office space far above market values and requested National Treasury to work with the Department of Public Works (DPW) to address this. It subsequently emerged that DPW has established a structure to address this issue.

8.10 The Committee believes that National Treasury needs to be more effective in ensuring that departments spend and account for public funds appropriately.

8.11 The Committee requests National Treasury to brief it on the “twin peaks” legislation reasonably soon.

8.12 The Committee requests National Treasury to brief it on issues of “retirement reform” reasonably soon.

8.13 The Committee noted that the budget of the Financial and Fiscal Commission had been decreased and raised questions about how seriously the Commission is being taken. The Committee expressed its concern that the FFC CEO was serving in an acting capacity for too long and that the matter needs to be finalised soon. The Minister explained that part of the reason for the delay was the anomaly that the FFC CEO also served as Chairperson. The matter is being addressed. The Committee feels that there may be a need to re-consider the role of the FFC taking into account the experiences since its establishment and developments since then. Government, parliament, the FFC, civil society stakeholders, experts and others need to review the role of the FFC over time.

8.14 The Committee welcomed the Minister’s statement that the allegations of corruption by the CFO of the Financial Services Board were being investigated and once the process was completed the Committee would be informed and could engage on the matter.

8.15 Following questions raised by the Committee on the Davis Tax Review Committee (DTRC) and the “transfer pricing”, “tax base erosion” and “profit shifting” challenges, the Department agreed to brief the Committee as soon as it has processed key aspects of the DTRC.

8.16 The Department agreed to brief the Committee on the long term fiscal report and public sector risks.

8.17 The Committee welcomed SARS survey to assess the attitudes on compliance to find out what motivated compliance. The survey would be done every year and SARS would develop an index.

8.18 The Committee welcomed SARS decision to provide more regular tax clearance certificates, but felt that this might serve to prejudice small businesses that do government work and are not paid within the 30-day period stipulated, and requested National Treasury to give more attention to this matter.

8.19 The Committee feels that more attention needs to be given to the management of our borders, especially Beitbridge . While welcoming the progress at Beitbridge and some of the other borders, including the use of more scanners, the committee feels that more needs to be done. The Committee agreed that it would engage further with SARS about progress on the One-Stop-Border Posts (OSBP).

8.20 The Committee feels that given the effectiveness of SARS, it should do more to assist other African countries. SARS pointed out that South Africa leads the African Tax Administrators Forum (ATAF) and has been assisting many other countries on the continent. SARS played a role in the Southern Africa Customs Union (SACU), which had a trade facilitation program encompassing information technology and the building of capability amongst member states. SARS had established a customs academy which provided for regional and continental training. SARS was training detector dogs for Mauritius and Namibia, and Kenya also wanted similar assistance.

8.21 While recognising the challenges, the Committee feels that SARS needs to increase its efforts to be more demographically representative. SARS explained that it had a graduate scheme with about 300 people annually and some of these graduates were placed within the organisation. The Committee believes that there is also a need for better succession planning. The Committee will keenly monitor this.

8.22 The Committee feels that given the importance of SARS, it should not continue to have an Acting Commissioner for much longer and government needs to decide on a Commissioner reasonably soon. The Minister said that the government recognises this and is attending to the matter.

8.23 The Committee commended SARS for constantly seeking to modernise its operations and improve its functioning. Despite its challenges, the majority in the Committee feel that SARS is performing very well and is deserving of the accolades it often receives both domestically and internationally. The Economic Freedom Fighters (EFF) disagrees with this view. The EFF believes that SARS should be raising much more revenue and has failed to deal with “transfer pricing”, “tax base erosion” and “profit shifting”.

8.24 The majority in the Committee feels that National Treasury, for all its challenges, is performing well overall. Of course, it can and needs to be more effective, as the Department itself acknowledges.

9. Committee needs to be more effective

9.1 The Standing Committee needs to be more effective in its oversight and other roles. It needs to make more effective use of the newly established Parliamentary Budget Office; secure appropriate research and other support staff; work more cooperatively with the Appropriations and other relevant parliamentary committees;

9.2 The Committee will meet with all the entities that fall under National Treasury within the next six weeks and thereafter develop a more structured programme.

9.3 The Committee believes that the form and formats of parliamentary reports need to be reviewed and the Chairperson of the Committee will engage with the relevant structures within Parliament on this.

The Standing Committee on Finance, having considered Budget Vote 10: National Treasury recommends that the House supports Budget Vote 10: National Treasury.

The Democratic Alliance (DA) reserves its position on the Budget Vote.

The Economic Freedom Fighters (EFF) opposes National Treasury’s Budget Vote.

Report to be considered.