Transcript Presentation to the Western Cape Provincial Legislature

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
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
2
OUTLINE OF THE SUBMISSION
• FFC’s Submission on the 2011 MTBPS is
divided into following sections:
I. Macroeconomic Outlook and Fiscal Framework
II. Medium Term Spending Priorities
III. Concluding Remarks
FFC Submission on the 2011 MTBPS
3
I. MACROECONOMIC OUTLOOK AND
FISCAL FRAMEWORK
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
5
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
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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
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ECONOMIC OUTLOOK: INFLATION
• 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
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ECONOMIC OUTLOOK: EXCHANGE
RATE
• 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
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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
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ECONOMIC OUTLOOK:
UNEMPLOYMENT
• 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
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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
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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
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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
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II. MEDIUM TERM SPENDING PRIORITIES
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
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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
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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
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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
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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
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III. CONCLUDING REMARKS
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
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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
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CONCLUSION (CONT.)
• Reaching all the health MDGs (child and motherrelated 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
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CONCLUSION (CONT.)
• Reaching all the health MDGs (child and motherrelated 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
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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
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THANK YOU.
Financial and Fiscal Commission
Montrose Place (2nd Floor), Bekker Street,
Waterfall Park, Vorna Valley, Midrand,
Private Bag X69, Halfway House 1685
www.ffc.co.za
Tel: +27 11 207 2300
Fax: +27 86 589 1038