1. 2017 Budget Analysis

2. Outline Purpose Background Strategic direction Key proposals
Fiscal goals depend on growth
Fiscal framework: key proposals
Tax collection
Revenue proposals
Tax revenue 2017/18: uncertainty
Tax expenditure
VAT proposal for 2018
Expenditure proposals for transformation
Functional changes
Economic changes
Estimated changes to headcounts
Measures addressing fiscal risks
Division of nationally raised revenue
In summary

3. Purpose
The Money Bills Amendment Procedure and Related Matters Act enables Parliamentary Committees to amend Money Bills
The PBO supports Parliament in its oversight role by providing advice and analysis on Money Bills and related matters
This presentation analyses the revised MTEF, considering its responsiveness to address the country’s social and economic challenges within current fiscal environment

4. Background The role of the budget: Promote distribution
Direct scarce resources toward catalytic investments in human and physical capital
Economic performance:
The budget depends on the economy to generate the resources to finance these investments
South Africa had several years of very low growth
The 2017 Budget:
Calls for fiscal consolidation
The Budget Review explains :
“The budget plays a central role in transformation by promoting distribution and directing scarce resources toward catalytic investments in human and physical capital. But the budget depends on the economy to generate the resources to finance these investments, and South Africa has had several years of very low growth (p.1.)”
Overall, there is recognition in the 2017 Budget Review that this is a moment for transformation but this possibility is constrained by several years of low growth. Therefore, as with the past few budgets, the 2017 Budget Review calls for fiscal consolidation.

5. Background (cont.)
Mainstream economics separates fiscal and monetary policy since the 1970/80s
The view of modern mainstream economics is that government spending and debt influences inflation and aggregate demand
What if government borrows more to support much needed transformative household consumption and investment?
One example:
Government borrows R1.00 to support a R1.00 increase in household consumption or infrastructure investment
The average multiplier for sectors that would benefit from this spending is 1.6
The increase to GDP of that R1.00 consumption should be R1.60
The contribution to the growth rate is greater than the interest rate
What if government could borrow more to support much needed transformative household consumption by the poor and increased public sector investment to increase GDP:
According to Pasinetti (1997) economies can run deficits while sustaining and even lowering their debt to GDP ratio if the interest is consistently lower than the growth rate. Therefore, there is an alternative to fiscal consolidation to manage debt levels and debt service as a percentage of GDP.
The mainstream economics approach to fiscal and monetary policy since the 1970/80s (and the rise of monetarist economics) is that
they are separate. Modern mainstream economics differ about this separation of fiscal and macroeconomic policy effects. They say government spending and debt influences inflation and aggregate demand.
For example:
Government borrows R1.00 to support a R1.00 increase in household consumption of the poor (or infrastructure investment).
The average multiplier for sectors that would benefit from this spending is 1.6 (see p.20 of 2017 Budget review for multipliers).
The increase to GDP of that R1.00 consumption should be R1.60. Therefore, the contribution to the growth rate is greater than the interest rate.

6. Strategic direction
The 2017/18 budget aims to give effect to the transformation action agenda by financing government programmes to:
Ensure that many more people live in dignity every year
Radically improve access to services and economic participation across all racial lines
Energise growth and create jobs
Increase investment and development at all spheres of government

7. gross borrowing requirement for 2017/18
Fiscal framework: key proposals
R36. bn
contingency reserve
2017/ /20
Slower fiscal consolidation (Rbn)
R220.9 bn
gross borrowing requirement for 2017/18
additional PIT bracket
limited PIT bracket relief
↑ fuel levy
↑ dividend withholding tax

8. Fiscal goals depend on growth
Main fiscal policy goal: contain budget deficit and slow pace of debt accumulation
NT GDP forecasts more accurate than IMF, World Bank and BER (PBO, 2016)
Lower growth → may require additional consolidation measures (revenue and expenditure) to realise current fiscal policy objectives - adverse effects on service delivery, investment and realisation of social objectives
Higher growth → additional fiscal consolidation measures may not be necessary, other
Upcoming public sector wage negotiations present a risk
Budget balance as a share of GDP (%)
Net debt as a share of GDP (%)

9. Tax collection
In 2016/17, for the first time since 2009/10, tax revenues are expected to grow slower than the economy
2016/17 gross tax revenue budget was R1.175 trillion
Revised revenue shortfall is estimated at R30.4 billion
Is there room for improvement in tax collection efficiency?

10. Revenue proposals – 2017/18
New PIT bracket (45%) income > R1.5mn
↑R4.4 bn
PIT
↑R16.5 bn
Change in taxes affects growth, consumption, income distribution and progressivity of the tax system
The least-harmful suite of revenue changes is required
Low economic growth, high unemployment, high food prices and poor corporate profitability must be considered
↑ PIT will dampen consumption and growth
The new PIT brackets and ↑ dividend withholding tax furthers the progressive nature of the PIT system
Higher fuel cost - 22% of South Africans use mini bus taxi to get to work
Limited relief for PIT bracket creep
↑R12.1 bn
↑ dividend withholding tax
15% → 20%
↑ 6.8 bn
↑ transfer duty threshold
↓ R448 mn
Changes to the revenue instruments will affect growth, consumption, income distribution and progressivity of the tax system
Critical to ensure that the suite of revenue changes has the least-harmful effect on the economy while realising country’s growth and fiscal objectives
Changes must be considered in context of low economic growth, high unemployment, high food prices and poor corporate profitability
↑ PIT will have a dampening effect on household consumption and growth
Creation of new PIT brackets and ↑ dividend withholding tax furthers the progressive nature of the PIT system
Efficiency concerns
Low income households may be affected by a higher fuel cost - 22% of South Africans (especially at lower income levels) use mini bus taxi to get to work
Potential taxes for implementation during the 2017/18 financial year:
Carbon tax
Sugar tax
↑ general fuel levy
↑ R3.2 bn
↑excise duties on tobacco & alcohol
↑R1.9 bn

11. Tax Revenue for 2017/18 – Uncertainty
There is a 50% chance of the actual tax revenue collected for 2017/18, falling somewhere between a 13.5bn shortfall and a R13.5bn surplus
Tax Revenue for 2017/18 – Uncertainty
50% Confidence Interval
Using Treasury’s historical forecast errors after the global financial crisis, we have constructed this chart to show the degree of uncertainty inherent in the Tax revenue forecast.
The chart shows Treasury’s Tax Revenue forecast for 2017/18 of R1.26 trillion. PBO’s analysis estimates that there is a 50% chance of the actual tax revenue collected for 2017/18, falling somewhere between a 13.5bn shortfall and a R13.5bn surplus.
Similarly there is a 70% chance of the final tax revenue collection figure falling somewhere between a R20.8bn surplus and R20.8bn shortfall, and a 90% chance of it falling somewhere between a R32.9 billion shortfall and surplus of the same value.
We’re showing the committees this because we think it’s important to recognise that forecasts are seldom precise indicators of the future and are, therefore, subject to uncertainty. For the purposes of oversight over public finances and for the consideration of the proposed fiscal framework, committees could consider the implications of the possible outcomes described above. Planning for potential contingent outcomes is a critical component of good fiscal planning. The committee may consider asking Treasury for an outline of the actions they plan to take in the eventuality of another R30bn shortfall for example. Similarly, what would be the implications of a R30bn surplus? Planning for these eventualities is important and parliament could consider playing a more active role in this process.

12. Tax expenditure estimates
Tax expenditure estimated at R 127 billion or 14. 7% of gross revenue:
Tax expenditure estimates
PIT expenditure main areas R50 billion
Pension and Retirement R26 bn (51 %)
Medical Aid R19 bn (38 %)
Other R 5 bn (11 %)
VAT expenditure main areas R 48 billion
19 Basic food items R19bn (40 %)
Fuel (petrol + diesel + paraffin) R18bn (37 %)
Other R11bn (23%)
CIT expenditure main areas R 4.8 billion
Small Business Corp R 2 bn (43%)
ETI and Learnership subsidies R 1.9bn (41%)
Other R 0.9bn (16%)
Customs & Excise main areas R 24 billion
Motor Vehicles R18.5 bn (77 %)
Diesel Refund R3.9 bn (16%)
Other R1.6 bn (7%)
Due to lack of latest tax expenditure statistics the average numbers are used. Average tax expenditure from 201/12 to 201/15: R billion, or 14.7 % of the total gross revenue:
PIT and
VAT take-up most of the tax expenditure
Is there a need to relook some of the tax incentives to recoup some of the revenue forgone, and reinvest the revenue in other more productive economic sectors?
Is there a need to assess the impact of each tax expenses on, poverty, inequity and employment- to determine value for money?
Are ETI and Learnership allowances well targeted and unintended consequences prevented?
NT, promised three years ago that they are reviewing some of the tax expenditures. In order to improve fall through by Parliament, Committees may have to request a specific deadline for such study to be submitted to Parliament for consideration.

13. VAT proposal for 2018
Due to the lack of expenditure statistics beyond 2014/15 an average (2011/12 to 2014/15) is used.
Removing zero-rating in fuel lead to a potential of R17, 8 billion revenue
R 17, 8 billion would be equivalent to additional 5.2 % revenue in for 2018/19
Fuel impact directly or indirectly or in many instances affects all the levels of households, with low income households likely to be impacted more.
However
Parliament may have to consider VAT reforms as a whole.

14. Expenditure proposals for transformation
Redistribution to low and middle income households:
No student fee increases for lower income families
The threshold for transfer duties increased
Increase in social grants to the most vulnerable:
Old age grants
Disability and care dependency grants
Foster care grants
Child support grant
Redistribution through the division of revenue:
3 new conditional grants
Increases in current grants
Reprioritisation
The budget attempts to be redistributive
No student whose combined family income is below R per annum will face fee increases at universities and TVET colleges for 2017.
All poor students at universities and TVET colleges, who applied and qualified for NSFAS awards, will be supported.
An increase in the threshold above which transfer duty is paid from R to R900 000.
Social assistance grants provide income support to the most vulnerable:
The old age grant increase by R90 to R1600 for pensioners over the age of 60, and R1620 for those over 75.
The disability and care dependency grants also increase by R90 to R1600 a month.
Foster care grants increase by R30 to R920 a month.
The child support grant increases by R20 to R380 a month
Three new conditional grants take effect in 2017/18, and they will:
Expand access to early childhood development and improve facilities
Provide for increased employment of social workers
Improve opportunities for learners with profound disabilities

15. Functional changes since 2016 MTBPS
National government projected underspending of R3 billion in 2016/17 during the adjusted budget process.
The consolidated revised underspending for 2016/17 is R6.3 billion
Declared unspent during the adjustments budget amounted to R1.3 billion

16. Economic changes since 2016 MTBPS

17. Estimated changes to headcounts
Total average budget growth for compensation of employees is 7.2 per cent
The average growth in unit cost in selected National Departments vary between 4.0 and 12.0 per cent

18. Measures addressing fiscal risks
Wage Bill
Reduce appointments in non-critical positions to stabilise headcounts
Inefficiencies in expenditure
Improve budget execution
Improve In-year monitoring
Procurement reforms
Financially troubled public entities
Budget neutral assistance by National Treasury
Contingent liabilities
PPPs
Government guarantees
Multilateral institutions
Reliable headcount data
National, provincial and local (Headcounts on provincial level decreased by 2.8%: ? in which sectors)
Compatibility of systems
Programme evaluations and expenditure reviews:
Sample observations from the expenditure reviews show
Housing – Less housing units were delivered than reported
Water and sanitation –Weak revenue management, a failure to bill consumers, low payment levels and ineffective debt collection undermine the sustainability of water services
Programme logic
The quality of performance information
Bearish processes and structures
Services are delivered far from Parliament
Upcoming public sector wage negotiations present a risk
High oversight expectations of Parliament

19. Division of nationally raised revenue
Main budget expenditure of R billion
Division of Revenue in 2016/17: R1 307 billion
National departments 48.0%
Provinces %
Local government 8.9%

20. Thank you

21. Estimated changes to headcounts

22. Expenditure per function