Pre-Budget briefing by the Parliamentary Budget Office

Meeting report

Briefing: 
The Chairperson welcomed MPs and the Chairpersons of  Finance for the Free State and Gauteng provinces. He said there would be interaction after the budget was tabled on 26 February.

Director of the Parliamentary Budget Office (PBO) pre-budget briefing  
Prof Mohammed Jahed, Director of the Parliamentary Budget Office (PBO), said the objective of the briefing was to provide a framework for analysis for parliamentarians. It would try to link the budget to the policy framework which had been adopted, namely the national development plan and derive issues for consideration when the budget was presented to them for analysis.

He reviewed the global economic trends that influence budgets because one needed to look at the totality of South African budgets to identify and view trends since 1994. One had to take a long term view of budgets. He  highlighted trends which influenced the budget by periodising the analysis into the four terms of government.

He said South Africa’s growth was sluggish. At certain times the economy had been hit by crises for example the  Asian crisis and the global financial crisis. The SA economy mirrored what happened in the global economy that is SA was part of economy and was  influenced by it. SA and developed countries were not doing as well as emerging economies. Treasury (NT) had forecast some sluggish growth which meant sluggish exports and investors would not look at SA unless something was done. This level of growth would  impact on the balance of payments and on debt.

From 1994 the country had had the Reconstruction and Development Plan (RDP) and GEAR and some growth in this period until hit by economic crises. Then ASGISA was introduced in the third period and the international financial crisis hit the economy. The question to ask was, were these policy responses at the time appropriate responses.

The fourth period included the present  Industrial Policy Action Plan (IPAP) and the NDP . The question that has to be asked was whether the  budget reflect the economic policy of the government, because the budget was a reflection of the strategic plan of government.

Treasury was forecasting some growth, but America’s quantitative easing would have a knock on effect on the global economy which would impact SA negatively. For too long the focus has been on the budget numbers rather than the policy frameworks.

He said the country faced consistent budget deficits and this had implications for debt and whether we had money to spend. The reform of the fiscal and economic environment would not happen on its own and would need an improved public sector so the reform of the public sector was critical. In SA the public sector totalled 20-30% of the budget, yet in France and Germany it was much higher at 60-70% but the public service was better performing. If government wanted to increase public sector spending then the public sector had to reform.

The country’s spending pattern had been high because of the world cup and at the time had fiscal space to spend. Now there was less money to spend  on infrastructure development.

He said the question of whether the exchange rates were increasing or decreasing was not important . What was important was the volatility of the currency. So what was needed was a good fiscal macro economic government policy

South Africa was regarded as part of the fragile five, which included Turkey, India, Indonesia and Brazil, who all had massive current account deficits. He said one budget did not address everything, it was part of a process. He said the question to ask was what we were doing to stabilise the volatility of the currency.

He said inflation had been high in the 1980/90’s and SA had introduced and adopted inflation targeting in 2000 to maintain inflation within a band. The band had been breached many times. To use interest rates to control inflation within the band  was a blunt instrument. In other countries monetary policy had two or three other objectives like stimulating growth or unemployment. In South Africa we only had one monetary policy which was to protect the value of the rand.

The PBO had looked at the NDP and allocated it to the 2013 budget to see which priorities would be allocated because the budget was the financial expression of the strategic plan. It was important therefore to know according to what policy was the budget being allocated.

He said there would be a slower global recovery which would mean slower growth locally and he  did not  don’t expect to see miracles happening.  Quantitative easing would result in slowing depressed demand for SA exports.

He ended off the presentation with a list of domestic risks and issues for consideration by parliamentarians.

Discussion
Mr W Makhubela (Limpopo, COPE) wanted clarity on what formula was used to arrive at the police percentage in the slide linking allocation with the policy framework.
 
Mr C De Beer (Northern Cape, ANC) said municipal officials needed training to plan at least three years ahead.

Mr B Mashile (Mpumalanga, ANC) asked if the PBO interact with the Treasury. Was the basis of this report the same as that which Treasury used to produce the budget. He wanted a narrative to accompany the graphs. He asked what the PBO’s forecast was on the exchange rate and  what their estimate was on inflation targeting and there advice regarding the latter. Would not  the depreciation of the rand lead to increased exports. 

A member of parliament asked what Prof Jahed thought of  the projections for GDP and the budget surplus or deficit.. Was the PBO’s model similar to the Treasury’s. Was debt consolidation sustainable as per the Treasury projections.

Mr D Joseph (Western Cape, DA) said the reform of the public services was not happening. He suggested a cap on total wages paid. He added that municipal revenue collection was still a problem.

Mr R Lees (Kwazulu-Natal, DA) asked what emerging markets were doing differently. What was the Professor’s view on the impact of quantitative easing.

Mr D Van Rooyen (ANC) asked how the PBO’s analysis compared to the October MTEF projections. Why could the PBO not advise on budget challenges through specific interventions, was it not part of their mandate.

Ms B Mabe (Gauteng, ANC) said the PBO had been established because parliament realised that they could not only rely on the Treasury. She  asked if they could also check provincial budgets. Could the office look at what emerging economies had done differently that benefited them. What would the impact of the budget be on the economy.

The provincial chairperson  for Finance in the Free State, Mr Neels Van Rooyen, asked what the PBO could do at the provincial level as they did not have the luxury of a budget office. Why was the interest rate hike regarded as a risk domestically.

Mr Mashile asked how domestic risk would affect the budget.

The Chair said a meeting would be held with the PBO after the budget  but before it met with Treasury.

Mr Jahed said that based on the questions asked, he had done his job, which was to make parliamentarians aware of the past budgets which would in turn stimulate questions. The office worked for the parliament and requests could be forwarded to the office. He would not be able to answer all the questions because that would take too much time.

The office did not have its own forecasting model but could utilise a consensus service.

The office would develop a narrative to accompany the graphs. Members could add their questions to the list of questions to be posed to the Minister for answering.

Ms Nelia Orlandi, PBO Senior Policy Analyst, said the formula used was not their own formula but one from Treasury and the allocation was done according to functional groups, for example the police and defence were in one functional group. The figure of 9.3% was for the functional group not just the police.

Ms Mmapula Sekatane, PBO Senior Policy Analyst, said one needed demand for exports to increase. South Africa’s traditional export markets like the UK and the Eurozone were not out of the recession yet and sales to them would therefore not increase.

Mr Rashaad Amra, PBO Economist, said there was a semantic difference between the terms GDP and GDP growth

Mr Jahed said there had been no specific interventions mooted because parliament had to instruct the office what to research because the office could not do all the research. But this would take a few years. The same applied to fiscal projections.

The office would supply  a broad picture for the parliamentarians to target specific issues.

The office would be developing their own databases to do forecasting.

Mr N Van Rooyen  asked if the office could assist the provinces.

The Chairperson  said the office was for the national parliament. However it had extended invitations to the provinces because it recognised that it would be beneficial to them. The NCOP catered for the provinces and the provinces could use this channel.

The meeting was adjourned.