Report of the Select Committee on FInance on the Medium
Term Budget Policy Statement (MTBPS), dated 10 November
2004:
The Select Committee on Finance reports as follows:
1. Introduction
The Minister of Finance tabled the MTBPS in Parliament on 26 October
2004. In a joint sitting on 27 October 2004, the Select Committee on
Finance, the Portfolio Committee on Finance and the Joint Budget
Committee were briefed on the MTBPS by the National Treasury, led by
the Minister of Finance.
Furthermore, two economists and a research organisation appeared before
the Select and Portfolio Committees on Finance on 29 October 2004, viz
Prof Brian Kantor from Investec, Mandla Maleka from ESKOM and
Ms Penny Parensie from the Institute for Democracy in South Africa
(IDASA).
2. Overview of MTBPS and Briefing by National Treasury
2.1. World Economic outlook
The National Treasury reiterated the sentiments expressed in the MTBPS
regarding global developments and economic growth. The Minister of
Finance, Hon Trevor Manuel, indicated that the MTBPS is tabled at a time
of difficulty in the global economy, including high oil prices (which have
risen to $50 a barrel), and moderate global economic growth. There is
growing recognition that this is not just a temporary occurrence, but could
impact on long-term economic growth, both at domestic level and globally.
However, the National Treasury continuously monitors developments in
this area, including the inflationary impact on the domestic economy, as
these affect the South African economy continuously.
South Africa’s continuous participation in global trade reform, economic
development and transformation is crucial, as it will improve market access
of South Africa’s exports in the global economy.
2.2. Economic and fiscal policy reform and benefits in past 10 years
Economic growth is expected to rise steadily in the MTEF period, with the
exception of the third year of the MTEF, in which it decreases marginally.
This scenario will be informed by increased domestic demand, low interest
rate, a strong Rand, improved consumer and business confidence, as well as
strengthened recovery of the global economy. Economic growth is also
expected to be strongly informed by the micro-economic reform strategy,
with emphasis on infrastructure development, upgrading of transport
infrastructure, extension of energy capacity and strengthening human
resource skills and challenges. Both State-owned enterprises and the
private sector will play a crucial role in this regard.
Low inflation, a stronger Rand and increased economic growth have had a
net effect of pulling down interest rates. Inflation and interest rates are
projected to remain low, with the possibility of decreasing even further over
the MTEF period. CPIX inflation is expected to remain within the target
range of 3-6% that it has maintained since September 20031.
In addition, the Government has made significant strides in terms of public
finance and the budget transformation and reform process. Through
legislation such as the Public Finance Management Act (PFMA), 1999,
accountability and management of public resources continuously improve.
Table 1: Macroeconomic forecast2
Calendar Year 2004
Estimate
2005 2006 2007
Household Consumption 4,3% 3,9% 3,5% 3,7%
Government Consumption 5,4% 2,9% 3,1% 3,3%
Gross Fixed Capital Formation 9,6% 8,2% 7,7% 8%
Exports 2,3% 3,7% 4,9% 6,9%
Imports 12,7% 5,9% 5,7% 7%
Real GDP Growth 2,9% 3,9% 3,7% 4,2%
CPIX Inflation 4,4% 5,1% 5,0% 5,1%
Current Account Balance (% of GDP) -2,2% -2,7% -2,5% -2,7%
One of the most important strategies to improve economic growth is the
Government’s plan to raise the overall rate of capital formation from its
present level of about 15-16% of GDP to 25% by 2014. Currently, private
sector investment growth has been the main source growth, and will
continue to be reinforced by rising public sector investment in transport
infrastructure and household services. Investment in transport infrastructure,
more efficient communications and information technologies and
accelerating the pace of investment in housing and community services will
be prioritised in line with the micro-economic reform strategy.
Important policy priorities for the MTEF period include reducing the
regulatory burden on businesses, investing in skills and education, land
reform and agricultural development, improved municipal development
planning and administration and a comprehensive response to HIV and
AIDS and associated social development challenges. The Minister of
Finance and economists indicated that human resource constraints in the
economy are cause for concern.
The growth in domestic output strengthened over the first part of 2004,
supported by the global recovery, strong domestic demand and moderate
interest rates. Although all sectors indicate positive growth trends, the
services sectors were the main source of growth. Manufacturing and
construction have also recorded more growth during the current year3.
1. CPIX Inflation was 3,7% in August 2004, and is forecast to average 4,4% during 2004. It is also expected
to remain within the target range, raising somewhat due to high demand pressures and exchange
rate-related import costs to about 5% in 2005.
2. The values for he MTEF period areall forecast values (MTBPS: 9).
3. Although the construction sector grew significantly, the latest Survey for employment and Earnings by
Statistics South Africa indicates that employment by the sector fell from 333 700 to 282 000 (-15,6%) jobs
over the past 12 Months. The overall economy has shed 73 000 jobs over the same period, representing
1,15 of the formal sector and a total of 6 497 jobs.
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ANNOUNCEMENTS, TABLINGS AND COMMITTEE REPORTS NO 106—2004
With regard to employment creation, the results of the Labour Force
Survey, conducted from March 2003 to March 2004, have shown positive
results4. In the short term, the government aims to accelerate investment
and job creation through targeted incentives and Extended Public Works
Programmes (EPWP) for sustained longer-term growth. The EPWP,
together with a strengthened focus on skills training and capacity building,
will play a crucial role in narrowing the duality of the economy.
2.3. Fiscal Framework and Revenue issues
Tax policy considerations for the 2005 Budget include:
_ Tax reforms to amend the tax burden on small and medium-sized
enterprises, which is particularly important to the Government’s plans to
eradicate poverty and inequality.
_ Review of tax treatment of health care benefits, which has unintended
effects and is not satisfactorily aligned with the objectives of health
policy.
_ Review of deduction of business travel cost against the motor vehicle
allowance.
_ Review and reform of the tax aspects of the pension fund industry.
_ Review of mineral taxation.
_ Other taxes to be considered, relate to the FIFA World Cup 2010,
Value-Added Tax (VAT), environmental fiscal reform and taxes relating
to the lower spheres of government, particularly provinces.
National revenue estimates this year are expected to exceed the February
budget estimate, from R327 billion to R328,2 billion, as a result of gains in
personal income tax and VAT receipts offsetting the anticipated shortfall in
corporate tax proceeds5.
The budget framework presented in the 2004 MTBPS provides for growth
in real non-interest expenditure of 4,3% in real terms over the MTEF period
and then by over 6,5% in 2005/06. The fiscal deficit is set to increase to
3,5% of GDP in 2005, and then declines to 2,7% by 2007/08.
Total non-interest revenue to be divided between the three spheres of
government is R357,5 billion for 2005/06, R387,5 billion for 2006/07 and
R416,5 billion for 2007/08. This translates to a real growth rate of 5% in
2005/06, 3% in 2006/07 and 2% in 2007/08 (IDASA: 2004)6. Allocations
to Provincial and Local Government spheres are expected to increase over
the MTEF, with Local Government increasing at the expense of National
Government.
4. The survey results indicate an increase in total employment in the South African economy of 419 000 jobs
since March 2003. The estimate of the unemployment rate declined from 31,2 per cent in March 2003 to
27,8 percent in March 2004.
5. The main budget revenue is R1,2 billion higher than projected, mounting to R328,2 billion. Higher than
projected increases in remuneration together with buoyant consumer spending are projected to offset the
tax revenue impact of lower corporate tax revenue. Gross tax revenue in 2004/05 is estimated to be R1,9
billion higher than estimated mainly due to higher than projected revenue of R3,8 billion from personal
income tax and R4 billion from value-added tax. Corporate income tax is expected to yield R6,2 billion
less than budgeted this fiscal year. Over the MTEF period, rising corporate taxes and further tax base
broadening measures will contribute towards increased revenue buoyancy resulting in a slight increase in
the overall tax burden.
6. IDASA’s response to the MTBPS.
The bulk of resources will go to provinces, but National Government will
get the bulk of resources, although the share to National Government
will increase in the third year of the MTEF7. The table below indicates the
percentage shares of additional resources among the three spheres of
government.
TABLE 2: Division of additional resources between the three spheres
over the MTEF8
Percentage share
2004/05
Estimate 2005/06 2006/07 2007/08 Total
National
Departments 27,4% 19,0% 24,2% 32,1% 27%
Provinces 69,3% 75,5% 70,2% 62,3% 67,4%
Local
Government 3,4% 5,5% 5,5% 5,7% 5,6%
In terms of the total resources, provincial government gets 58,3%, National
Government 37,1% and Local Government 4,6%. The table below
indicates the division of total resources between the three spheres.
Table 3: Division of total resources between the three spheres
Percentage shares 2004/05 2005/6 2006/07 2007/8
National 38% 37,2% 36,9% 37,1%
Provincial 57,5% 58,1% 58,4% 58,2%
Local Government 4,5% 4,6% 4,6% 4,7%
Table 4: Percentage Growth between spheres
Percentage growth 2004/05
Estimate
2005/06 2006/07 2007/08
National 12,6% 8,9% 7,6% 8%
Provincial 14,7% 12,2% 8,9% 7,1%
Local Government 16,9% 14,3% 8,3% 8,1%
3. MTEF Allocations
The main budget revenue is R328,2 billion, which is R1,2 billion more than
the budget estimate made in the 2004 budget review due to higher than
expected revenue9. The deficit is projected to be 3,2% in the 2005/06
financial year, 3,5% in 2006/07, and then reduced to 2,7% by 2007/08 for
sustainability reasons.
The MTBPS projects growth of 4,3% in overall non-interest expenditure,
representing additional expenditure of R50 billion over the MTEF. Most of
the additional funds will be allocated to the social services sector.
Total non-interest revenue to be divided between the three spheres of
government is R357,5 billion for 2005/06, R387,5 billion for 2006/07 and
R416,5 billion for 2007/08. This translates to a real growth rate of 5% in
2005/06, 3% in 2006/07 and 2% in 2007/08 (IDASA: 2004)10.
Table 1 indicates the real growth in consolidated National and Provincial
expenditure over the MTEF.
7. This is partly due to the shift of the social security function to the National Social Security Agency.
8. The allocation from 2005/06 to 2007/08 are projections.
9. This resulted from personal income tax of R3,8 billion higher than expected, VAT collections R4 billion
more than expected and transfer duties were R1,2 billion higher than expected. These were, however, offset
by lower than expected corporate taxes, resulting in an excess of R1,2 billion.
10. IDASA’s response to the MTBPS.
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ANNOUNCEMENTS, TABLINGS AND COMMITTEE REPORTS NO 106—2004
Table 1: Real increase in consolidated National and Provincial
expenditure by type of service
Service
2004/05
Revised
Estimate
2005/06
projection
2006/07
Projection
2007/08
Projection
Annual
Average
2004/05-
2007/07
Protection Services 2,5 6,2 1,0 -0,4 2,3
Defence -4,7 5,9 -2,8 -5,5 -1,8
Justice, police and
prisons 7,0 6,4 3,1 2,2 4,7
Social Services 8,6 5,3 3,5 1,2 4,7
Education 4,7 2,6 1,5 1,5 2,6
Health 2,0 5,0 3,7 1,8 3,1
Social Security and
Welfare 17,9 11,5 6,0 0,4 8,9
Other Social Services 12,0 -3,3 -2,3 1,2 3,0
Economic Services
and Infrastructure 8,3 2,9 3.8 7,7 5,7
Water and related
services 6,4 1,0 -1,0 2,0 2,1
Agriculture, forestry
and fishing 4,9 4,7 4,8 2,7 4,3
Transport and
Communication 5.9 0,0 4,4 8,1 4,6
Other economic services
12,7 5,7 4,5 11,1 8,5
Other 5,6 2,7 1,3 3,4 3.2
Contingency Reserve 0,0 0,0 26,7 89,9 29,2
Total 7,2 5,8 3,1 2,9 4,7
Source: IDASA Budget Information Service (MTBPS 2004, Table 5.2, Pg 57)
4. Provincial and Local Government Spending
Allocations to Provincial and Local Government spheres are expected to
increase by 4%. However, National Government will receive a bigger share
in the third year of the MTEF11. Provinces will receive the majority of
additional resources (67,4%), while National Government receives 27%
and Local Government receives 5,6% over the MTEF.
In terms of the 2005 financial year, provinces receive 75,5%, National
Government receives 19% and Local Government receives 5,5%.
In terms of the total resources, Provincial Government receives 58,3%,
National Government 37,1% and Local Government 4,6% in the 2005/06
financial year. In addition, all three spheres reflect real growth in
allocations.
Provincial Spending
In terms of provincial spending, the most important policy change will be
the shift of social security to the National Social Security Agency, as well
as the inclusion of the primary health care function, which was previously
provided by Local Government, in the provincial budget. The addition of a
nationally administered conditional grant for social security is the major
change to the conditional grant framework for the 2005 Budget. The grant
will be effected from 1 April 2005 as an interim measure in preparation for
the shifting of the administration of this function to the Social Security
Agency.
11. This is partly due to the shift of the social security function to the National Social Security Agency.
Other important shifts include the Integrated Nutrition Programme
administered by the Department of Health, which will now be administered
by the Department of Education, and the housing subsidy programme.
Local Government Spending
The Local Government equitable share rises by R2,3 billion over the
MTEF, which will mainly be utilised for providing basic municipal
services. Furthermore, additional infrastructure grants grow by R500
million for the expansion of municipal infrastructure networks over the
three-year period.Asmaller fraction of Local Government expenditure will
be utilised for capacity-building.
Committee Concerns and Comments
Most of the issues were raised within the context of trends and issues in the
MTPBS 2004. The issues raised related to the following issues:
1. There was general satisfaction regarding the liberalisation of exchange
controls and establishment of South Africa as a financial centre. However,
a concern was raised regarding the move by Botswana to compete with
South Africa, particularly as Botswana offers more attractive interest rates
than South Africa (15% as opposed to the 25% offered by South Africa).
The Treasury indicated that South Africa is not far off the mark by
international standards in terms of interest rates. In addition, the SADC
treaty and protocol advocates mutual support rather than competition
between SADC countries and thus Botswana violates this. The move by the
Republic of Botswana could have implications on regional SADC
harmonisation challenges such as macro-economic policy, including
financial regulations.
2. The balance between current and capital expenditure was raised as a
point of concern in terms of the balance between the capital and current
accounts being understated according to the PFMA12. This was also raised
in relation to the Ministry of Public Enterprises, where R165 billion is
expected in areas such transport, ports and electricity infrastructure.
The National Treasury indicated that the PFMA and related National
Treasury Regulations provide guidance on these matters, and that the Act
emphasises the responsibility of Accounting Officers in this regard.
The Treasury, however, also noted that challenges such as budgeting within
the cluster system context, whilst ensuring accountability and oversight of
public resources, would still need to be addressed and improved on over
time. This is important in view of the government’s integrated approach
towards development, even though from a budgeting point view individual
departments are still separately budgeted for.
3. A concern regarding whether Government has changed its policy
regarding proceeds from the restructuring of state-owned enterprises was
raised. The concern emanated from the fact that the traditional approach
has been to use the proceeds to finance the debt deficits and not to channel
the proceeds into state owned enterprise capital projects.
The National Treasury indicated that there has not been a change in policy
and that the present function has always been contained in the policy
pronouncements, even though infrastructure investment and development
could have been de-emphasised in the past.
12. Public Finance Management Act No. 1 of 1999, as amended.
4. A concern was raised regarding whether economic growth of 4% was
sufficient and how this relates to the reduction of unemployment, poverty
and addressing challenges of the two economies, and whether the country
will be able to significantly reduce the level of unemployment by 2014. The
National Treasury indicated that these are continuous challenges that
should continuously be addressed by 2014 and beyond.
5. A concern was raised regarding whether stability and a positive
exploration of resources in the African continent would ease the oil price
burden. The National Treasury responded that supply and demand will
always determine the selling of some of these resources and that countries
will always sell their resources to the highest bidder. The problem has
several complex dimensions such as refining and shipping. For example,
Nigeria has much oil but no refining capacity; this function is carried out by
the private sector.
6. A need to review the Usury Act of 1968 to allow for moneylenders who
exceed a certain credit limit to be charged criminally was expressed.
Further concerns were raised regarding moneylenders who are not banks
and Mzanzi, as well as the macroeconomic implications of microlenders
who are not bound by interest rate decisions of the South African Reserve
Bank. Furthermore, the figures of indebtedness of South Africa that were
published by the SARB and Stats SA do not include debts to micro lenders
by mostly poor sectors of the society.
The Treasury responded by indicating that two Bills will be published in the
next two weeks13. A good benchmark in this regard is the established
Brazilian Post Bank and establishment of little terminals across that
country, which successfully facilitates and promotes access to bank
accounts and credit. In addition, access to financial services should be dealt
with in a way that does not throw people to loan sharks, and the
micro-lending industry should be further reformed and regulated to serve
poor economic sectors.
7. Concerns were raised regarding challenges to the South African tax
policy and revenue collection system, particularly the decrease in corporate
taxes and its implications on the future sustainability of the tax system. In
addition, cutting taxes slowly reduces the tax base and the country runs the