1. For an Equitable Sharing of National Revenue
Briefing to the Standing Committee on Finance on FFC’s Submission on the 2011 Medium Term Budget Policy Statement
1 November 2011
For an Equitable Sharing of National Revenue

2. FFC Submission on the 2011 MTBPS
Background
Submission: response to requests from Standing Committee on Finance for FFC to comment on the 2010 MTBPS
In terms of Part 1 (3) {1} of the FFC Act (2003) as amended
Provides for Commission to act as a consultative body and make recommendations to organs of state in all spheres on financial and fiscal matters
And Section 4 (4c) of the Money Bills Amendment Procedure and Related Matters Act (MBAPRMA)(2009)
Requires Committees of Parliament to consider the FFC’s recommendations when dealing with money bills and related matters
FFC Submission on the 2011 MTBPS

3. Outline of the Submission
FFC’s Submission on the 2011 MTBPS is divided into following sections:
Macroeconomic Outlook and Fiscal Framework
Medium Term Spending Priorities
Concluding Remarks
FFC Submission on the 2011 MTBPS

4. I. Macroeconomic Outlook and Fiscal Framework

5. FFC Submission on the 2011 MTBPS
Background
Little has changed over the last year in terms of the vulnerability of South African economy to interruptions in global recovery
2011 MTBPS: downward revision of 2011 GDP figure (as expected)
Major trading partners’ slow recovery may impact sectoral composition of GDP
Finance, real estate and business services, manufacturing and wholesale, retail, motor trade and accommodation – likely sectors to be affected
FFC Submission on the 2011 MTBPS

6. Economic Growth and NGP
SA will need a much higher economic growth than set out in NGP (7% annually)
Closer to the range of 8-9% if 2011 MTBPS forecasts materialise
Highly unlikely given the growth rates projected for EMEs over the same period
GDP growth forecasts in 2011 MTBPS based on restrictive assumptions:
Orderly resolution of EU debt crisis, avoidance of US recession and continued strong growth in EMEs (particularly China)
Current climate uncertain, so more pessimistic GDP growth rates are possible – exerts even more pressure on job-creation goals of government
FFC Submission on the 2011 MTBPS

7. Economic Outlook: Fiscal and Monetary Policies
To date, fiscal and monetary policies coordinated and countercyclical – aimed at boosting recovery
In 2009/10 tax year, fiscal deficit increased to -7.3% of GDP (worst budget deficit since 1961)
Currently at -5.5% of GDP (more than -5.3% budgeted in February 2011)
Expected to decrease further over the medium run as SA economy recovers
Relatively strong fiscal position threatened by possibility of global economy experiencing a renewed downturn
Result in lower government revenue and higher government borrowing
Repo rate reduced five times in 2010 to 5.5% (current level) to boost consumption spending
FFC Submission on the 2011 MTBPS

8. Economic Outlook: Inflation
Downward pressure: lower demand
Upward pressure: weaker Rand, food prices (rising commodity prices), wage costs (public sector wage demands) and energy prices
Recent CPI figures indicate a rise from 4.1% in March 2011 to 4.2% in April 2011
This slight increase indicates that inflation is on the rise
Coincides with upward revision of inflation forecasts by SARB
Indicates a repo rate increase later this year and further increases in 2012
FFC Submission on the 2011 MTBPS

9. Economic Outlook: Exchange Rate
Important tenet of NGP: drive the value of Rand down
Render locally-produced goods more competitive and create jobs
SARB: increased reserves and capital flow moderation
Weaker Rand
Rand depreciated slightly since the beginning of 2011
Slight slow-down in G7 countries, world demand expected to decrease together with demand for SA goods
Globally, we are at the height of uncertainty – expect capital outflows and hence a depreciation of the Rand
World inflation expected to rise, hence countries will increase their interest rates → capital outflow from SA
However, weaker Rand benefits exports but may fuel inflation
To obtain more benefits from a competitive currency, SA needs to improve productivity and contain domestic costs
FFC Submission on the 2011 MTBPS

10. Economic Outlook: Savings and Investment
NGP: savings and investment in SA below levels needed for sustained growth
Savings
To achieve growth of more than 4%, domestic savings rate has to be some 24% of GDP
Currently at some 16% (compare to 40% in China)
Even worse: current ratio of savings to disposable income of households is -0.3
Investment
Modest pick-up in investment rate expected in 2011 (low capacity utilisation)
FFC Submission on the 2011 MTBPS

11. Economic Outlook: Unemployment
QLFS 2011Q1: unemployment increased across all race groups despite moderate economic growth (current figure: 25%)
In terms of sectors:
Agriculture, construction, transport and communications, as well as financial and business services all reported job losses between 2010Q1 and 2011Q1
Need to tackle structural impediments to job creation over the coming years: lack of appropriate skills and education, labour market legislation and conditions, poor attention to entrepreneurship and small business
FFC Submission on the 2011 MTBPS

12. FFC Submission on the 2011 MTBPS
Fiscal Consolidation
Fiscal consolidation still important in SA context
Government debt set to rise to 40% of GDP by 2015 after which it is expected to stabilise and decline
How realistic is this assumption (e.g. rising future interest rates, rising debt service costs, etc.)?
Debt service ratio is increasing pointing towards increasing state debt burden and towards expenditure increases being financed by debt
Sharp increase in foreign indebtedness, though its share remains fairly constant over the medium term
FFC Submission on the 2011 MTBPS

13. Economic Outlook: Some Challenges
Government balancing act: inclusive growth and job creation together with fiscal sustainability and low inflation
Structural challenges
Infrastructure: transport and energy (absence of sufficient electricity generating capacity and implications for NGP)
Public service delivery
Even though the 2010 GHS indicates a slight improvement in service delivery, management and maintenance of service delivery infrastructure are also key
FFC Submission on the 2011 MTBPS

14. Economic Outlook: Some Challenges (Cont.)
Other risks:
Commodity Prices
Research carried out by the Commission suggests that oil price increases would reduce GDP by between 2.2% and 2.5%
Impact on government deficit varies widely among the scenarios, ranging from a worsening of 12% to 22% in the floating prices and the fixed price scenarios, respectively
Debt Service Costs
Necessary for government to borrow in order to pursue countercyclical policies and ensure sufficient service delivery – exposure to foreign exchange risk must be considered
Rising personnel costs coupled with increased government dissaving
FFC Submission on the 2011 MTBPS

15. II. Medium Term Spending Priorities

16. FFC Submission on the 2011 MTBPS
Background
Average real annual growth rates of most government expenditure components are too high even though government wants to keep increases in expenditure at moderate levels
Real annual increases should be kept at around 3% if SA government is to achieve a balanced budget by 2015/16
Thus, these increases pose a further risk to fiscal consolidation
All of the categories have higher average real growth rates with the exception of few (general public services, fuel and energy, recreation and culture, and science and technology)
FFC Submission on the 2011 MTBPS

17. FFC Submission on the 2011 MTBPS
Job Creation
FFC welcomes priority shift in government expenditure towards infrastructural investment as critical vehicle for job creation
Capacity constraints
Funds earmarked for capital projects remain unspent
Question: Are capacity-building initiatives sufficient to improve delivery given increases in infrastructural funding, or is subnational government set to fail on a grander scale?
For example, IDIP review has identified a number of problems that are not really dealt with
In this regard, Commission’s 2010 recommendations remain relevant
FFC Submission on the 2011 MTBPS

18. FFC Submission on the 2011 MTBPS
Health And MDGs
Although SA has made some progress in achieving the MDGs, gaps remain
Simulations carried out by the Commission show that if the economic conditions do not change, there will be progress in achieving some MDGs but this progress will not be sufficient to achieve all
South Africa should be able to achieve MDG 1, but not any of the health MDGs (even when GDP growth of 4.5% is assumed)
Further scenarios conducted to investigate the impact on public spending to achieve the MDGs, separately and simultaneously
FFC Submission on the 2011 MTBPS

19. FFC Submission on the 2011 MTBPS
Health And MDGs (cont.)
Commission’s recommendations for the 2012 in line with 2011 MTBPS on prioritisation of MDGs
Emphasis on greater efficiency and cost-savings
Important development: NHI
Need for government to come up with an interim financing mechanism that is credible
Financing of proposed pilots (PES transfer or a conditional grant)
Well known that full programme will cost a lot more; poses a fiscal risk
The Commission will make LT budget projections under scenarios that reflect different assumptions about future policies for revenues and spending following Government LT financing discussion paper
FFC Submission on the 2011 MTBPS

20. FFC Submission on the 2011 MTBPS
Social Security
2011 MTBPS: strengthening selected child welfare programmes – early childhood development services and home and community based child care and protection
Commission’s view: proposals worth funding but in the context of reforms to resolve the structural issues in the sector
Guaranteeing an effective support/supervision mechanism
Ensuring integrated planning of the services rendered by DSD and NGO’s
Giving more money to the sector should be guided by the need for a serious policy review about the role of the state and the effectiveness of delivery models
FFC Submission on the 2011 MTBPS

21. III. Concluding Remarks

22. FFC Submission on the 2011 MTBPS
Conclusion
A main theme running through the 2011 MTBPS: economic growth slower than expected → revenue growth lower, budget deficits slightly higher
Emphasis: need to shift priorities in government spending away from consumption towards infrastructural investment → job creation
FFC’s submission on the MTBPS details and highlights key issues emerging from the 2010 MTBPS and tries to link the issues with the FFC’s recommendations that were tabled in May 2011
Resonance with government?
Parliament: process MTBPS and take on board FFC’s recommendations
FFC Submission on the 2011 MTBPS

23. FFC Submission on the 2011 MTBPS
Conclusion (cont.)
Growth prospects pose a threat to achieving the 5 million job creation goal by 2020
Global economy
SA should not rely on its global counterparts but should be doing more domestically to find solutions to employment problems
FFC welcomes shifts in the composition of public expenditure towards investment and economic development
Government should weigh up carefully the impact of increasing spending against the risk associated with increasing taxation rates, spending levels and re-allocating expenditure from capital expenditure
FFC Submission on the 2011 MTBPS

24. FFC Submission on the 2011 MTBPS
Conclusion (cont.)
Reaching all the health MDGs (child and mother-related health goals) within four years seems unlikely, even impossible
National, provincial and local government should further reprioritise expenditures in respect of Equitable Share and Conditional Grants for 2012/13 to move towards attaining MDGs
In this respect, Government should continue prioritising MDG 6 (HIV indicators) in the interim as its attainment will have positive impacts on other MDGs (positive spillovers)
Time-frame for attaining all outstanding MDGs simultaneously should be extended beyond 2015 to make the task feasible
FFC Submission on the 2011 MTBPS

25. FFC Submission on the 2011 MTBPS
Conclusion (cont.)
Reaching all the health MDGs (child and mother-related health goals) within four years seems unlikely, even impossible
National, provincial and local government should further reprioritise expenditures in respect of Equitable Share and Conditional Grants for 2012/13 to move towards attaining MDGs
In this respect, Government should continue prioritising MDG 6 (HIV indicators) in the interim as its attainment will have positive impacts on other MDGs (positive spillovers)
Time-frame for attaining all outstanding MDGs simultaneously should be extended beyond 2015 to make the task feasible
FFC Submission on the 2011 MTBPS

26. FFC Submission on the 2011 MTBPS
Conclusion (cont.)
Important changes promised with respect to NHI
Financing of proposed pilots through conditional grant
The Commission will make LT budget projections under scenarios that reflect different assumptions about future policies for revenues and spending following Government LT financing discussion paper
Proposals to strengthening selected child welfare programmes worth funding but in the context of reforms to resolve the structural issues in the sector
FFC Submission on the 2011 MTBPS

27. Thank You. Financial and Fiscal Commission
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