Demystifying the Budget Process at Parliament

The Minister of Finance delivered his Budget Speech on 21 February 2018.  Many was surprised at the 1% increase in Value Added Tax (VAT).  This despite the warning signs when the Minister of Finance announced in the Medium-Term Budget Policy Statement (MTBPS) in October 2017, that there was a deficit of R48 billion deficit and National Treasury (NT) needed to find sources of funding to fill that deficit gap.


The Fiscal Framework and Revenue Proposals (fiscal framework), Division of Revenue Bill and Appropriations Bill was tabled in Parliament after the budget speech.  The budget process is governed by the Money Bills Amendment Procedure and Related Matters Act (Money Bills Act) of 2009.  The Act prescribes strict timeframes within which the budget process has to be finalised.  In terms of the Money Bills Act, both Houses of Parliament, that being, National Assembly (NA) and National Council of Provinces (NCOP) must finalise the fiscal framework within 16 days of the Budget being introduced to Parliament.  The fiscal framework is a written instrument or rather policy of NT which sets out government income, expenditure and debt for 2018/2019.


Public hearings and the debate in the NA on the fiscal framework concluded on 7 March 2018.


The Portfolio and Select Committees on Appropriations will now commence public hearings on the Division of Revenue Bill and the Appropriations Bill.  These bills must be finalised within 35 days of the adoption of the fiscal framework.  During this phase of the budget process, national departments will report on its strategy plans to portfolio committees on how it intends to spend the budget allocated to it in line with priorities highlighted in the State of the Nation Address (SoNA) and other policies such as the National Development Plan.  These budgets will be individually debated and approved by NA in Parliament.


During the public hearings of the joint Standing Committee on Finance and Select Committees on Finance on the fiscal framework, stakeholders cried out against the 1% VAT increase and particularly, that they did not have sufficient time to interrogate the proposed tax increases.  Stakeholders were not in a position to make substantive submissions on how else NT could have obtained the funds necessary to fill the budget deficit of R48,2 billion.


NT explained that the fiscus was placed under severe pressure to find revenue streams due to the budget deficit and the December announcement of free higher education.  There was also the risk to the fiscus in terms of uncertainty in the pace of the recovery of the economy, the public service wage pressure and precarious finances of state owned companies (SOE’s).


Cosatu was deeply angry with government for seeking to balance the budget upon the backs of working and middle classes and called on Parliament to reject the VAT increase and to modify the fuel increases.  The trade union emphasised that more needs to be done about wasteful and fruitless expenditure.  The Auditor General announced in November 2017 that over R45 billion was lost in the 2016/17 financial year through wasteful, fruitless and irregular expenditure. 


The Rural Health and Advocacy Programme (RHAP) highlighted that the VAT increase will reduce the real disposable income of poor communities which is a considerable risk in increasing poverty and inequality.  Zero-rated goods do not necessarily make up the majority of low-income household’s food consumption needs.


The Organisation for Undoing Tax Abuse (OUTA) advised that macroeconomic indicators should not be overly relied on to justify the increase in VAT.  Above inflation increases to social grants or marginal expansion of VAT exempt foodstuffs will not offset the reduced purchasing power for poor and working-class consumers.  It further warned that increasing taxes year after year without material improvement in governance posed a major risk to the economy.


Parliament Watch emphasised the importance of public participation in the budget process and that there was a constitutional obligation to provide meaningful opportunities for public participation and taking measures to ensure that people can take advantage of the opportunities provided.


Civil society coalitions collectively called for Parliament to withhold its approval of the tax proposals, effectively calling for a moratorium on the VAT increase until a proper process of public consultation and engagement had been followed.  It also recommended a review of the present processes of public participation in relation to timeframes, format, and implementation.  They say the present process limits public participation in the budget process.


The sentiments of stakeholders on better public participation was echoed in both the Standing and Select Committees on Finance reports on the fiscal framework.  It emphasised the importance of the public participation process in increasing taxes.  It proposed that more time is allowed for consultations with a wider range stakeholders and civil society.  The joint committee report emphasised that it was acutely aware and sympathised with civil society and stakeholders that it did not have sufficient time to interrogate the fiscal framework and make substantive proposals. 


In its report, the committees pointed out that one of the challenges is that the budget process is governed by the Money Bills Act which prescribes strict timeframes in terms of finalising the various stages in the budget process.  It was pointed out that the Money Bills Act is in the process of being amended to give both the public and parliament more time to process the budget.


The joint committee therefore reluctantly supported the VAT increase as there was no other alternative source to fund the R22,9 billion.  Given time constraints, civil society and stakeholders were not in a position to make effective and substantive proposals as to how the deficit could be funded.  The VAT increase will therefore come into effect on the date announced by the Minister of Finance in the budget speech, which is 1 April this year.  The Value Added Tax Act, 1991 allows the Minister of Finance to implement tax increases through VAT.


Parliament has 12 months within which to accept, reject or amend the tax increases.  Such an amendment will be implemented through Rates and Monetary Amounts and Amendment of Revenue Laws Bill (Monetary Bill) that the Finance committees will finalise later in this year.  This should allow for more meaningful consultations, in that stakeholders and civil society will have more time to interrogate the tax increases and make substantial alternative proposal.


The budget process is also cyclical.  The Minister of Finance in delivering the MTBPS in October, will announce government expenditure and income.  This will give an indication of the state of government finances.  As was the case last year, when it was announced that there was a budget deficit of R48,2 billion. 


Another recommendation in the Finance committees report was that NT should in future MTBPS tabling be better prepared for taxation changes.  I assume this to mean that there should be more transparency as to proposed tax increases as this will assist the consultation processes.  Admittedly, such information may impact market sensitivities. 


Another option is for stakeholders and civil society to monitor the process leading up to the MTBPS.  In this stage, national departments have to brief portfolio committees on its annual reports for the previous year.  National departments have to state how funds allocated to it was spent.  It is also accompanied by Auditor General reports.  However, the budget process is complicated and there are many macro and micro economic factors that needs to be considered.  Which begs the question, should NT have provided more information when the MTBPS was delivered in October last year about proposed tax increases?  Given that there was already considerable policy uncertainty, a down grade by S and P Global Ratings and Moody’s placing its review on hold in late November 2017.  How would a statement of a proposed VAT increase have been received in late 2017 and how would that have affected policy uncertainty and further downgrades? 


Zelna Jansen

CEO, Zelna Jansen Consultancy