Economic and Fiscal Review and Outlook, role of Parliamentary Budget Office briefings

Standing Committee on Appropriations

07 July 2014
Chairperson: Mr P Mashatile (ANC)
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Meeting Summary

The Parliamentary Budget Office (PBO) briefed the Committee on its legislative mandate, core functions, organisational structure, scope, workflow, and reporting lines. PBO was derived from the Money Bills Amendment Procedure and Related Matters Act of 2009 which provided for a procedure to amend Money Bills before Parliament, and for norms and standards for amending Money Bills before provincial legislatures and related matters. Section 15(2) of that Act outlined the core functions of the PBO. Essentially, it would be monitoring, conducting research and technical analysis, and giving advice to Parliament on fiscal and related economic matters. The PBO currently supported the four Parliamentary Finance and Appropriations Committees in matters related to the Money Bills Amendment Procedure and Related Matters Act, although it was intended that as its capacity grew, it would be able to support other committees also. The chain of requests from the executive authority and Parliament was explained. It was noted that the PBO would capacitate Committees, whose Members had less fiscal experience and expertise than the financial institutions over whom they exercised oversight, and build capacity in Parliament to interrogate budgets and policies more effectively. Members asked whether there were relationships also with the Auditor-General (AG), and Standing Committee on Public Accounts, and stressed the need to build relationships between this Committee, the Standing and Select Committees on Finance and Appropriations, SCOPA and the Standing Committee on the Auditor-General. Members appreciated the clear presentation. They asked who “stakeholders” included and stressed the need to reach out to all people on the street and get their views, irrespective of their levels of education. They asked for more information on the vacancies and times to fill them, within the PBO, and urged that reports, particularly on matters like fiscal dumping, be presented in time for Parliament to take corrective measures.  

The second presentation focussed on South Africa’s economic performance in the first quarter of the year as against the projections on growth, noting the impact of slower growth. It detailed what was in the consolidated fiscal framework, and the payments that needed to be made, distinguishing between non-interest expenditure, interest expenditure, the impact of credit ratings, the need to maintain priority programmes, priority spending sectors, and the implications. The GDP growth in 2013 was 1.8%, and although the GDP estimated growth for 2014 was 2.7%, there had been a contraction in the first quarter of 2014 of 0.61%. Revised estimates from different institutions for 2014 were between 1.9% and 2.3%, but government had yet to revise its own estimates. It was explained that the National Development Plan (NDP) had identified priority programmes that would ensure performance on the outcomes of the NDP, and the national budget was allocated towards programmes clustered together within functional groups. It was explained that there were choices to make and Parliament would need to be quite strict with departments on how they would still achieve their objectives even with less money being made available, which included hard choices on getting value for money and revising ways of working and performance.

Members asked how local and provincial government would be brought to compliance, suggested that more information was needed on job losses, and what the figures were on expenditure. They asked what might be considered an acceptable level of government debt and asked if any more exact figures, rather than estimates, were available. Members asked for clarity on what “non-interest expenditure” comprised, asked how the situation could be turned around to try to achieve 5% growth by 2019, and stressed the importance, when monitoring, of assessing whether value for money was achieved, particularly in the education and health sectors, which showed large allocations to salaries. Parliament needed to be quite stern when monitoring, particularly on expenditure trends. It was noted that the Committee would be holding a two-day strategic workshop at end July.

Meeting report

2014 Appropriation Bill: Parliamentary Budget Office briefing
Prof Mohammed Jahed, Director, Parliamentary Budget Office, briefed the Committee on the legislative legislative mandate, the core functions, organisational structure, scope, workflow, and reporting lines of the Parliamentary Budget Office (PBO). Its mandate was derived from the Money Bills Amendment Procedure and Related Matters Act, 2009, (the Act) which provided for a procedure to amend Money Bills before Parliament, and for norms and standards for amending Money Bills before provincial legislatures. The Act gave effect to sections 42(3) and 77(3) of the Constitution. Section 15 of the Act established a Parliamentary Budget Office (PBO). According to Section 15(1) of that Act, the PBO should provide independent, objective and professional advice and analysis to Parliament on matters related to the budget and other Money Bills. Its scope of work extended to monitoring, research, technical analysis and advice on fiscal and economic matters.

Section 15(2) outlined the core functions of the PBO. It was intended to:
- support the implementation of the Money Bills Act by undertaking research and analysis for the committees referred to in section 4
- annually provide reviews and analysis of the documentation tabled in Parliament by the executive in terms of the Act
- provide advice and analysis on proposed amendments to the Fiscal Framework, Division of Revenue Bill and Money Bills and on policy proposals with budgetary implications
- monitor and synthesise matters and reports tabled and adopted in a House with budgetary implications, with particular emphasis on reports by other committees
- keep abreast of policy debates and developments in key expenditure and revenue areas
- monitor and report on potential unfunded mandates arising out of legislative, policy and budgetary proposals
- undertake any other work deemed necessary by the Director to support the implementation of this Act.

The PBO currently supported the Finance and Appropriations Parliamentary Committees in matters related to the Money Bills Amendment Procedure and Related Matters Act 9 of 2009. It was intended that all oversight committees of Parliament would be supported in the future. The PBO was currently focusing on policy, economic and fiscal review and outlook reports; economic and fiscal indicator briefs; research reports on specific topics as identified by Committee Members. It was doing stakeholder surveys. It would attend to capacity building for Members of Parliament and collaborate with other structures within Parliament.

Prof Jahed reminded Members that the Standing and Select Finance and Appropriations Committees considered Money Bills, and identified specific analysis and research required for decision making. The Committee Chairpersons submitted requests from the Executive Authority. The Executive Authority considered specific requests from committees and forwarded those requests to the Director of PBO. The PBO analysed, advised, built capacity, and facilitated discussions. The reporting lines were thus between the PBO and the Executive Authority.

Discussion
The Chairperson asked whether there was a relationship between the Auditor-General (AG) and Standing Committee on Public Accounts (SCOPA), which were other key structures that focused on accountability in terms of the budget.

Mr M Figg (DA) commented that it was the second time he had heard a presentation from Prof Jahed, and did not doubt that the PBO was in good hands; he was well able to make difficult topics understandable and he appreciated this.

Ms S Shope-Sithole (ANC) agreed that “even rural women” would be able to fully understand Prof Jahed, and she appreciated the presentation. However, she did want more detail on what was meant by “stakeholder participation; she stressed that this did not mean professors, academics or highly trained people, but should include to even the rural women who perhaps had not much education. She stressed that such people needed to make input into the business of the country. When she had chaired the Finance Committee in the Limpopo Province she had ensured that whenever it had a public hearing, in every region, women, irrespective of their level of education, came and made an input. She was sorry that there seemed to be a tendency in the National Assembly that only highly educated people were considered stakeholders.

Mr N Gcwabaza (ANC) appreciated the presentation from Prof Jahed, and the information he provided to the Committee, most of whom were new to this portfolio and had not had experience in financial matters.  He agreed that the stakeholder survey was very critical and there was a need to get a broader understanding of how people outside Parliament viewed the issue of the Division of Revenue and other matters. He wondered what the ability was of the PBO to reach out to people on the street. All the sectors  mentioned in the presentation were very important, but they could have a tendency to represent their own particular interests and hear what was important to them. He, like Ms Shope-Sithole, thought it important to hear what the ordinary people felt about the division of revenue, and what those in rural areas felt needed to be done. He hoped that Parliament, over time, would allow the PBO to grow to have that kind of wider reach, so as to debate those issues in Parliament.

Ms M Manana (ANC) welcomed the informative presentation. She wanted to know if the vacant positions were advertised and what PBO had done to follow correct procedure, whether the positions were funded for the current financial year, or even next year, and whether new staff would be taking up positions until the end of this Fifth Parliament.

Dr C Madlopha (ANC) also thanked Prof Jahed and reiterated the sentiments of other Members that this was particularly useful for those new to the Committee. She asked how South Africa could reduce the budget deficit without further compromising the key objectives of Government. She said that in the first quarter, the economy had shrunk by 0.61% and some economic analysts concluded that the country was in recession, although that view had not been shared by the Minister of Finance, on the performance in the first quarter. She asked for comment from Prof Jahed on that point. She also would like to hear which economic sectors were severely affected and what needed to be done to improve those particular sectors.

Ms R Nyalungu (ANC) asked what role Parliament could play in enforcing measures to improve the level of down-grading in the country.

The Chairperson said that some of the questions from Members would be covered in the next presentation, including the reduction of deficit and level of down grading.

Dr Madlopha noted that at the moment the PBO was assisting four Committees, two in the National Assembly (NA) and two in the National Council of Provinces (NCOP). The PBO was critical in relation to spending trends, and she hoped that it was intending to assist all the committees with their oversight “in the near future” but asked when that might be. This Committee needed to exercise oversight itself and would like to hear some timeframes to which the PBO could be held accountable.

Mr M Shaik Emam (NFP) also thanked Prof Jahed for the presentation. He asked how often this Committee would be getting reports. He had been particularly concerned to hear that reports on matters such as fiscal dumping were made only “at the eleventh hour” and thought it important to get timeous warning. He asked what mandate the PBO had to enforce compliance.

Prof Jahed said that, internationally, the reason for establishing budget offices was that this would strengthen the roles of executive and Parliament. He cited the example of National Treasury (NT)  which had over 200 economists on its staff. That Department used models, prepared budgets and other matters. However, when NT came to present these to Parliament, it was presenting to Committee Members who had no independent support to be able to interrogate those as part of exercising their oversight role properly, and provide input on where the economy should go. He stressed that when Parliament accepted the budget, it was also agreeing with economic policies that National Treasury had set for the country, and how the resources had been allocated, giving NT then the go-ahead to implement. Across the world, the executive was gaining more control on these matters than the legislatures where these legislatures were not given enough experience and expertise. As correctly indicated, most Members of Parliament were qualified people, but their role was political oversight, and so they were not necessarily well-versed in scrutinizing budgets, and needed more support and information on this point. That was the reason to set up a PBO. The PBO, with Committee researchers and content advisors, would give the Committee Members support in order that they could make more informed decisions based on the right kind of information.

Prof Jahed said that another role for the PBO was that it must package information, and make sense of it, so that MPs were able to exercise their minds properly to reach decisions. That was, broadly speaking, the kind of support that the PBO would provide to Committee Members.

Prof Jahed spoke to questions on surveys and noted that the PBO would not go ahead and develop a survey without consulting the Committee, whose Members must then given input on how perhaps that survey should be re-shaped or refined to meet the needs of the Committee, and that could be to include rural women, business, labour, and other sectors or groups. Dr Madlopha had been quite correct that the role of the Committee was indeed to exercise oversight over the PBO as well.

Prof Jahed said that o the filling of posts was not easy. In two rounds, the PBO had invited applications, held interviews and made offers, only to find that the potential staff had “gone” and turned down the offers: this had also happened with the analyst posts. Fortunately, there were some analysts in place. The PBO had now decided to head-hunt, which was a cheaper option, to get to a shortlist. The Chairperson and the Members of the Committee were most welcome to attend the interviews, and the PBO would make sure that would happens for future cases.

Prof Jahed said that the relationship between SCOPA and the AG was a very important issue, because when exercising fiscal oversight, Parliament also exercised oversight over expenditure, revenue and taxation. Previously, there had perhaps not been enough oversight over fiscal institutions of the country like the National Treasury, Financial and Fiscal Commission (FFC), and all the finance cluster institutions. Capacity building had to include and address that area and the AG was part of that. Some of the information the AG produced would be used to back up the information the Committee required, but it was also an institution over which Parliament must exercise oversight.

The Chairperson said that this made it clear that the Standing Committees on Appropriation and Finance must thus work very closely together, as well as the Committee on the Auditor-General and SCOPA. This Committee in particular needed to meet with the Standing Committee on Finance, and collaboration was important.  

Economic and Fiscal Review and Outlook briefing
Ms Nelia Orlandi, Senior Policy Analyst, PBO, said that her presentation would provide Members of the Committee with an assessment of the current economic situation underlying the fiscal framework, the impact on the estimated growth in revenue, expenditure, the budget deficit and government borrowing. It would be necessary to review outcomes of expenditure to consider possible reprioritisation, to strengthen or make efficiency gains within sectors. It would assist Members with making recommendations for possible adjustments to the current appropriations.

Ms Orlandi said that, in terms of economic performance, GDP growth in 2013 was 1.8%. The GDP estimated growth for 2014 was 2.7%. However, in the first quarter of 2014 there was a contraction of 0.61%, compared to the 3.8% growth in the last quarter of 2013. The revised growth estimates from different institutions for 2014 were now between 1.9% and 2.3%. There was therefore a possibility that government would also revise the growth forecast over the next medium term. The impact of slow growth revenue estimates were based on the economic performance. She explained that slower growth would translate into lower revenue collection rates. If expenditure levels remained the same, the budget deficit would increase. Higher deficits translated to higher borrowing requirements and interest expenditure.

Ms Orlandi noted that the level of interest payments was determined by total outstanding government debt and the cost of debt. The estimates of interest expenditure were susceptible to two distinct risks. Firstly, the total Government debt could grow beyond the estimated level. The downgrading of South Africa’s sovereign debt by credit rating agencies translated into higher interest costs on foreign borrowings and affected Government’s ability to borrow. She noted that in June 2014, two credit rating agencies downgraded South Africa’s sovereign credit rating. South Africa’s credit rating would be subjected to a further downgrade if the economic position deteriorated. A further downgrade would raise foreign debt service costs. Government would have limited space to raise more debt to fund future budget deficits. This would necessitate expenditure cuts on programmes. Such cuts would slow down the implementation of the National Development Plan (NDP).

Ms Orlandi said that the priority programmes of government were to ensure performance on the outcomes of the NDP, and the national budget was allocated towards programmes clustered together within functional groups. Some of the priority programmes included improving the quality of basic education, ensuring a long and healthy life for all South Africans, ensuring that all people in South Africa would be and would feel safe, an inclusive and responsive social protection system, moves to transforming society and unifying the country.

Ms Orlandi concluded that the implications of higher debt would be slower growth, less revenue, higher budget deficit, higher cost to borrow, fewer funds for spending on programmes, and that the outcomes of NDP would be compromised. The country, in response to this, should look at the root causes of the constraints to economic growth, reprioritisation, and efficiency gains and monitoring.

Discussion
Mr Shaik Emam said that he understood that much of the problem lay with local government. He asked what mechanism was being put in place and how it could be ensured that people in local and provincial government complied and assisted in bringing the issues up, otherwise the entire exercise that the PBO was putting in place would be futile.

Mr Figg said that as public representatives, Members needed to bring the information to the areas where they came from, as part of their oversight.

Mr Figg said that the reduction of economic growth needed to be converted into jobs. He asked what the losses were in jobs, as this would help Members to interpret the reduction in the economic growth. He also wanted to know what figures were available in regard to the increase in expenditure. He asked what would happen with regard to the decrease in the wage bill. He wanted input on what would be an accepted level of growth of total government debt. He noted that the presentation had referred to “an estimated level of growth of the total government debt” and said that there only seemed to be estimates rather than actual figures.

Mr Gcwabaza asked what was meant by “non-interest expenditure”. He said that the assumptions were that this was related to the wage bill, but asked if there were other points considered as non-interest expenditure.

Mr Gcwabaza referred to the call made by the President in the State of the Nation Address (SONA) of achieving 5% economic growth by 2019, and asked what was needed to turn the situation around, including what specific things needed to be done in the immediate and medium term, to ensure that by the time 2019 arrived, the growth of 5% would have been reached or was at least attainable.

Ms Shope-Sithole asked whether, when referring to “monitoring” the PBO was taking all statistics into account, considering whether value for money was being achieved, and, if not, how much was being lost and what the country could do to ensure that the money that was available was working effectively. She asked whether it was a good thing to boost the economy by printing larger quantities of money.

Dr Madlopha asked whether the PBO had made an analysis of the outcomes of education, and in this field whether there was value achieved for money. If not, then this had to be dealt with; Parliament could not approve money allocations without monitoring them..

The Chairperson said that the cross-cutting question was what implication there would be to the fiscus, if the economy did not grow by 2.7% as predicted, and there was less revenue than anticipated. Some departments maintained that they could do what they had predicted, but the question was how to achieve this with less money. There would have to be agreements on what must be prioritised and how to build efficiency. The truth was that there would be an impact on expenditure; there would not be anything that could not be prioritised. The role of monitoring would include keeping a close watch on these matters, and looking at what the departments would prioritise if they had less money.

Mr Gcwabaza asked whether it was not the right time for Parliament to take people into their confidence, without raising alarms, and say that in order to turn things around, everyone needed to tighten their belts, because the cost of living was very high.

Prof Jahed said that a report that was available, and he asked that the Committee check it and see whether it was in the technical format that the Committee wanted. The Chairperson had hit the nail on the head when he said that growth was down, and that was a message that revenue was going to slow down, with less to spend on resources and more need to set priorities. The PBO would be sitting down to determine how to address that problem.

He agreed that government debt was growing, which was going to be a problem for the budget. Government debt and interest had to be serviced, and the country had to deal with that point; there was a gap in expenditure and revenue, and the country was thus facing a deficit. On top of that there was still  inequality, poverty and unemployment. That applied to everyone and Members here represented everyone. It was the Committee’s decision whether to accept that situation or to try to “tell other stories”.  In the past, oversight was exercised in Parliament by inviting the departments to appear before committees, where they would be asked questions, and budgets would be “rubber-stamped”. Now, however, there was a difference and Parliament was calling for deeper analysis, and it was the route that it needed to follow as it moved forward.

Prof Jahed noted that there had been a plethora of policies over the years: Reconstruction and Development Programme (RDP), GEAR, and now the NDP, but he said that the country had a “short memory” because every time that policy changed, no one had evaluated the previous ones. Whilst the NDP was now “a bible”, which was a positive move, he said that the questions must be asked whether the fiscal framework was the right one to support delivery on the NDP. Somebody had to make it quite clear, for instance in education and health, that it was not right to spend such large portions of the allocations on salaries, and hard decisions were needed because it was not possible to have such large portions taken for salaries without other delivery. These were hard decisions that Parliament had to face.

Prof Jahed said that when the Chairperson was the Premier of the Gauteng Province, it had experienced economic growth. A main reason behind this was that there had been a targeting of overseas investments, which created a conducive environment, since Gauteng experienced the best economic growth during that time. The point was now who would champion the changes in the economy, which included who was going to champion the investment policy? Those issues were already highlighted in the document that was tabled before the Committee.

The Chairperson informed the Committee that on 29 and 30 July 2014 the Committee would be holding a  Strategy Session to engage more on those issues. Having asked those questions, Members probably should come with answers themselves by the time they got to the strategy session, on how to deal with those challenges going forward.

The Chairperson said, in relation to questions linked to budget increases, that the question had always been whether value for money was being obtained. It had been said that South Africa was spending lot of resources on education, but the expenditure was not matched by sufficiently good outcomes in the education system. There was much more progress in education in Zimbabwe and other countries, whose education budgets were far lower than South Africa. Therefore, there was a need to look at how the money was being spent, and the Committee would have to be tough on that point with all departments. That was something that the Committee would deal with as its role was strengthened and the PBO would capacitate committees when it came to assessing budgets; if there was insufficient capacity, especially compared to the 200 economists in the NT, it would be a great challenge to exercise proper oversight. Parliament, because it approved budgets, had to have the capacity to engage and deal with those issues.

Mr Brandon Ellse, Economist, PBO, answered the question on non-interest expenditure, saying that the budget divided expenditure, looking separately at interest payments, payments on Government debt and non-interest expenditure. Interest payments were mandatory and were the first payment from revenue; what was left over was the potential expenditure for non-interest purposes.

The meeting was adjourned.
 

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