Report of the Portfolio Committee on Finance on the Appropriation Bill [B5-2009] (National Assembly – sec. 77), dated 18 February 2009:
The Portfolio Committee on Finance, having considered and examined the Appropriation Bill and its related documents, referred to it, and classified by the JTM as a section 77 Bill, reports as follows:
Introduction
The Minister of Finance, henceforth the Minister, tabled the 2009/10 Medium-Term Expenditure Framework (MTEF) budget[1] in the National Assembly on 11 February 2009. Following the tabling of the budget, the protocol is that the Portfolio Committee on Finance allows for submissions to be made in response to the tabled budget. These submissions are in the form of budget hearings[2] with various stakeholders.
This report gives an overview of the 2009/10 Budget main themes. The engagements with various stakeholders through the budget hearings and submissions form part of this overview. The report consists of five sections. Section 1 gives an overview of the macro economic environment within which the budget was tabled. An overview of the current macro economic environment is important as developments in this broad environment to a large extent inform the scope and content of the budget. This section makes reference to a number of key macro economic indicators. A budget can be regarded as an instrument which reflects the priorities of a specific department or programme. In the 2009 Budget, the primary priorities/objectives are outlined as follows:
· Protect the poor;
· Build capacity for long-term growth;
· Sustain economic growth;
· Maintain a sustainable debt level; and
· Address sectoral barriers to growth and investment.[3]
In order to give meaning to this section of the report, an understanding of the above priorities is important within the context of the current macro economic framework. Section 2 focuses on the fiscal policy framework as set out in the budget. Section 3 gives a summary of the main revenue trends and tax proposals underlying the 2009 Budget. This section places the emphasis on how tax proposals affect individuals and businesses. This section also gives an overview of tax proposals which fall outside of the two broad categories of individuals and businesses. Section 4 draws conclusions, while section 5 highlights recommendations made by the Committee.
1. Macro economic outlook
It is important to note that the hearings took place within the context of the deepening international financial crisis. In the 2008 Budget Review, the Minister made reference to the credit crunch and volatile financial markets. In tabling the 2008 Medium-Term Budget Policy Statement, the Minister mentioned that the prospects for global growth are poor and that the short-term outlook is clouded by uncertainty.[4] In its presentation to the Committee, National Treasury pointed out that over the last twelve months; the global economy has shown a sharp deterioration. Evidence of this is in recent reports published by the International Monetary Fund on the World Economic Outlook. Whereas reports on the World Economic Outlook are usually published twice a year, economic growth projections have become so volatile this year that the World Economic Outlook has over the last ten months been published five times.
According to National Treasury, macroeconomic conditions have become more difficult as investment flows to emerging markets have dried up and the cost of capital on global markets became prohibitive.[5] In its presentation to the Committee, National Treasury pointed out that the major areas of concern in the macro economic environment are export volumes, falling manufacturing output and a slowdown in private investment.
In the introduction of his presentation before the Committee, Mr. J. Laubscher, Group Economist at SANLAM[6], stated that taking into account the current macro economic landscape, the tabled budget can be regarded as a pragmatic response to a challenging environment over which South Africa has little control. In this way Mr Laubscher pointed out that National Treasury did a good job in balancing the immediate need with the longer plan that goes into fiscal planning. Essentially therefore, the budget according to Mr Laubscher confirms that it is an outcome of government priorities.
1.1. Key Macro economic indicators
1.1.1. Gross Domestic Product (GDP) growth
The global economic crisis has resulted in a significant deterioration in South Africa’s growth outlook. During 2008, GDP growth slowed down to an estimated 3.1 per cent. According to National Treasury, GDP growth is expected to slow to 1.2 per cent in 2009. National Treasury goes on to state that economic activity is expected to start recovering in the second half of the year in response to declining debt levels, lower interest rates and a more expansionary fiscal policy[7]. According to Ms Nazmeera Moola[8], Economist with Macquarie First South Securities, GDP growth will slow sharply in 2009, led primarily by slowdowns in the mining and manufacturing sectors. Ms Moola’s forecast for growth in 2009 is at 1.6 per cent.
South Africa’s growth forecasts appear to be better than most of the countries in the developed world, but lower than the average for countries in the emerging world. According to Figure 1, the 2009 growth forecasts for the United States, the Euro zone, Japan and countries which are classified as advanced economies, all show negative growth. This view is shared by Laubscher. In Laubscher’s opinion, the IMF is looking for a sharp bounce in growth next year (2010). This, according to Mr Laubscher, is dependent on the credit situation improving world-wide. Figure 1 also indicates that South Africa’s growth forecasts for 2009 is higher than the world growth forecast.
Figure 1: GDP growth, selected countries and regions, 2008 – 2009
Source: National Treasury (2009a)
The panel of economists also commented on South Africa’s growth prospects vis-à-vis the rest of the world. According to Ms Moola, the current global slowdown pointed to deep growth concerns around the world. Business Unity of South Africa (BUSA) pointed out that in order to deal with the growing concerns of the global financial crisis, fundamental reforms needs to be instituted to ensure a better functioning global financial system. According to BUSA, South Africa’s growth is likely to fall to 0.7 per cent in 2009.
According to Laubscher (2009), South Africa is planning to become a member of the Organisation for Economic Cooperation and Development (OECD). Laubscher compares South Africa’s growth with that of OECD member countries. Laubscher pointed out that South Africa follows the same growth trend as many OECD countries. He furthermore stated that it will be extremely difficult for South Africa to get high growth which is independent of the world – this according to Laubscher is because South Africa’s economy is too open to be isolated.
1.1.2. Current Account Deficit
The Budget Review revealed significant downward revisions for the next three years to National Treasury’s projections for the current account deficit. The Budget Review (2009) states that the reason for the increase in the current account deficit as a percentage of GDP from 2007 to 2008 could be found in the widening gap between savings and investments. National Treasury projects the current account deficit to be at about 6.7 per cent over the medium-term.
Despite the projection of a lowering current account deficit, National Treasury pointed out that the management of the current account deficit is subjected to ongoing risks from the global financial crisis. In this regard, National Treasury stated that the increase in the current account deficit during the fourth quarter of 2008 was as a direct result of outflows from the equity markets.
Mr Laubscher pointed out that net private flows have decreased significantly to emerging markets. Furthermore, Mr Laubscher made the point that portfolio investments as a component of equity investment have also decreased. In addition to these direct capital outflows, National Treasury also pointed out that growing service and income payments to international investors, in part due to higher dividend and interest payments arising from strong capital inflows have also been a source of pressure on the current account.[9]
Ms Moola predicts the overall deficit to be at 4.5 per cent of GDP by the end of 2009. This is particularly due to a possible World Bank loan to Eskom amounting to US$5 billion. In the presentation to the Committee, Mr Laubscher pointed out that during January 2009, international capital flows to South Africa were on the positive side for the first time since mid-2008. The Federation of Unions of South Africa (FEDUSA) is of the opinion that commodity prices are expected to remain high, supporting terms of trade and sustainability of the current account. Furthermore, it is the view of FEDUSA that South Africa’s healthy financial sector, low external debt levels, and deep and liquid domestic capital markets will help to sustain foreign investor interest in South Africa.
1.1.3. Gross fixed capital investment
The South African economy has experienced an increase in gross fixed capital investment over the 2006 and 2007 financial years. The 2008 Budget Review stated that gross fixed investment will average at about 10 per cent over the 2008/09 MTEF. According to National Treasury, there will be a steep fall in the growth of gross fixed capital investment over the next three years. The forecast for gross fixed capital investment/formation is at 3.7 per cent for 2009 from a revised estimate of 11.5 per cent for 2008. The largest component of the slower growth in gross fixed capital investment over the MTEF will be from public sector corporations and general government. The sectors in which much of the capital formation will occur will be in electricity and transport.
1.14 Inflation
From January 2009 the new target measure for inflation will be headline CPI – this measure is replacing CPIX. According to National Treasury (2009a), CPIX inflation averaged 11.3 per cent during 2008. National Treasury is of the opinion that lower oil and food prices, coupled with weak local demand, will bring inflation back to within the targeted range of 3 – 6 per cent.
Ms Moola agrees with National Treasury. However, as Ms Moola stated, a drop to within the targeted range is too optimistic a prediction for the first two quarters of 2009. BUSA links the impact of the global financial crisis with the current monetary policy framework. According to BUSA, the current monetary framework has provided a solid anchor for inflationary expectations. FEDUSA also commented on price stability. According to FEDUSA, it is unlikely that the announced expansionary fiscal and monetary policy will lead to higher inflation at present. FEDUSA however cautioned against becoming too optimistic about inflation moving within the target range. FEDUSA is of the opinion that oil price volatility and exchange rate movements can quickly push the headline CPI beyond the targeted range.
1.1.5 Real output trends
A series of economic shocks had a detrimental effect on South African producers during the first nine months of 2008. These, according to National Treasury, included the following:
· Electricity shortages;
· Rising input costs;
· Higher interest rates; and
· Slowing demand.[10]
Figure 2 provides an overview of the growth in real value added by sector, 2007 – 2008.
Figure 2: Growth in real value added by sector, 2007 - 2008
Source: National Treasury (2009a)
The following can be deduced[11] from Figure 2:
· Agriculture was the best-performing domestic economic sector in the first nine months of 2008, with growth of 14.6 per cent compared with 2.3 per cent in the same period in 2007;
· Mining output fell by 6.9 per cent in the first 11 months of 2008, with lower production of diamonds, copper, nickel, gold and platinum group metals; and
· The growth in manufacturing output fell below 3 per cent in 2008. Output slid sharply on the electricity crisis in the first quarter of 2008, followed by the rapid deterioration in global and household demand.
Ms Moola commented on the fall in output in the mining and manufacturing sectors by stating that almost 270 000 people will lose their jobs in these sectors as a result of slower growth.
2. Fiscal Policy
National Treasury introduced the Fiscal Policy section of their presentation to the Committee with a statement that “public finances are under pressure”. This according to National Treasury manifests itself in the under collection of revenue to the amount of R14 billion for the 2008/09 financial year. For the 2009/10 financial year, the revenue amount according to National Treasury is revised downwards by R50 billion.
National Treasury pointed to two potential risks to the revenue forecast. These are a possible fall in company taxes (i.e. taxes received from profits on taxes) and a decline in VAT receipts as a result of slower domestic demand.
According to National Treasury, an amount of R57 billion is added to the baseline which changes the balanced budget to a deficit of R95.6 billion.[12] The growth in government spending in the present context serves two broad purposes.[13] Firstly, it ensures that the implementation of long term service delivery priorities is not
negatively affected by lower growth in revenue collection.[14] Instead of being forced to cut back on allocations when faced with lower revenue, government is able to devote greater resources to priority expenditure.[15] Secondly, by expanding government’s contribution to the economy, the fiscus is able to support economic activity at a time when global and domestic demand is faltering.[16]
FEDUSA considered the formulation of fiscal policy within the current economic context. According to FEDUSA, the current circumstances require an expansionary fiscal policy stance, in other words lowering of taxes and increasing expenditure. FEDUSA is of the opinion that there should have been a better balance between tax reduction and an increase in expenditure. IDASA commented on the common pitfalls in implementing fiscal policy. Specifically, IDASA cautioned that in order for government to achieve its fiscal policy objectives, unevenness of capital spending by government departments should be addressed - unevenness in government spending related to uneven spending and the tendency to spend late in the year.
2.1 The Budget deficit
In delivering his Budget Speech, the Minister mentioned that the consolidated government budget deficit rises to 3.8 per cent of GDP in 2009/10 before moderating to 1.9 per cent by 2011/12.[17] Looking back to the 2008 MTBPS, the likelihood of a higher deficit was already clear then. The 2008 MTBPS projected a budget deficit of 1.6 per cent of GDP for 2009/10, in order to maintain a real increase in expenditure from the 2008/09 to the 2009/10 budget.[18] The projected deficit is primarily a consequence of lower revenue estimates and higher spending. According to Ms Moola, the main reason for the deficit is the decline in government revenue.