Parliamentary Budget Office Overview; Economic and Fiscal Review and Outlook

Meeting report

Opening Remarks
The Chairperson opened the meeting, and after asking the Members to introduce themselves, called on them to confirm the minutes of the last meeting.

Mr T Motlashuping (ANC; North West) moved the adoption and Mr C de Beer (ANC; Northern Cape) seconded.

The Chairperson thanked the budget office for circulating the presentation on time. The Committee often appeals to other institutions to see the presentation beforehand.  Many presentations have graphs and figures, and so it is always useful to go through the presentation beforehand.

Parliamentary Budget Office Overview
Professor Mohammed Jahed, Director of the Parliamentary Budget Office (PBO) said that the purpose of the PBO’s meeting with the Committee was to provide it with technical support. The fundamental purpose of the PBO is to offer support to appropriations and finance committees of the National Assembly (NA) and the National Council of Provinces (NCOP).

The constitution gives the legislative body the power to amend money bills. The PBO is at the disposal of the Committee to accomplish such a task, and if the Chairperson wants the PBO to do so, the PBO will work with the content advisor or the researcher of the Committee.

The PBO provides advice and analysis on proposed amendments to the Fiscal Framework, Division of Revenue Bill and money bills and on policy proposals with budgetary implications. The legislature does not realize the importance of setting a directive for a fiscal framework. The rest of the country looks to the legislature for guidance and so there must be a more involved legislature. The legislature must provide advice, overall amendments and oversight.

Many legislators forget that they have a National Development Plan (NDP), and projects at the provincial level must be aligned with the NDP.

The PBO’s job is not to do the work of researchers or content advisers, but to receive work from within the Committee and take it from there.

He told the Committee he hoped the PBO could give them support, and would make sure that most of their staff attended meetings.

The Chairperson thanked Professor Mohammed Jahed, and asked if there were any areas where Members had questions.  He asked what the Professor meant in respect of capacity building. Many Members of the Committee on Appropriations did not have economics or finance as their background, but they dealt with very important concepts which they needed to understand fully.

Discussion
Mr De Beer said that it is very important that members of committees -- at least the chairpersons in other committees in Parliament -- understand budget analysis, and especially now, when they are rushing to deal with the Appropriation Bills.  Furthermore, once the budget is complete, they would need to come up with an induction or training on budget analysis in preparation for the Medium Term Expenditure Framework (MTEF) in October, ahead of the tabling of the national budget.

Mr Motlashuping said in light of the triple challenge of unemployment, poverty and inequality, he had looked at the organisational structure of the PBO, and one thing that came in mind is that the Committee should have been consulted when giving posts to people in the budget office. He was not sure whether the Department was complying with the rules when securing an office for officials, because he was not sure if the Committee had been consulted.

Professor Mohammed Jahed said that the PBO was meeting with universities to check on the type of training on budgeting and capacity-building that they could provide for the PBO.  However, the PBO needed help from all the chairpersons and members of committees.  He told the Chairperson that the best way to understand the budget was for Members to go through the documentation and, while he was sitting there, to ask questions and get direct help from the budget office. He explained that all appointments and development structures had been developed during the Fourth Parliament through an advising committee, with two House chairpersons and chairpersons of the finance and appropriations committees. There was not a new process for this term.

Mr De Beer said that there was a meeting between the PBO and the Select Committee for Appropriations before the last parliament adjourned.  It was a meeting in a small committee room in a new wing, and that was the last engagement that the Committee had with the PBO. They had made proposals and he hoped that the work would carry on.

The Chairperson said the presentation was meant to give an overview of the ways of doing business. He highlighted the comment that Professor Jahed had made about coordinating provinces. Coordination was a critical loop in provincial development plans and the Committee must not lose sight of that focus.

Economic and Fiscal Review and Outlook
Mr Brandon Ellse, Financial Analyst, PBO, said the purpose of the presentation is to provide the Members with an outlook on the impact of recent economic developments. The presentation provided an outlook for the next three years, such as future estimates of inflation and expenditure. The PBO is also there to scrutinize assumptions and provide the Committee with a review on outcomes of expenditure, so it could consider possible reprioritisation or strengthening efficiency gains within sectors.

The estimated GDP growth for 2014 was 2.7%, which was within the current fiscal framework. In the first quarter of 2014 there was a contraction of 0.61% quarter on quarter (qoq) compared to a 3.8% qoq growth in the last quarter of 2013. This contraction had happened globally, and there were a combination of factors which triggered it nationally, such as labour relations and issues concerning energy. As such, the revised estimates from different institutions for 2014 are between 1.9% and 2.3%, so there is a possibility that the government will revise its growth forecast for the medium term.

The goal of the Consolidated Fiscal Framework 2010/11-2016/17 is to reduce the budget deficit from 4% to 2.8%. The decrease will focus on non-interest expenditure, such as goods and services.

Wage bill increases were moving faster than the growth in expenditure or inflation.
 

Interest expenditure is expected to remain relatively stable. There are two risks, however.  One is that the government debt will grow beyond the estimate, and the second is whether the downgrade of South Africa’s sovereign debt by credit rating agencies will translate into higher interest costs on foreign borrowing and the government’s ability to borrow. The second risk is likely if South Africa’s economic outlook continues to deteriorate.

If there is slower growth there will be lower then expected revenue, a higher budget deficit and higher costs to borrow.  If the economy continues to deteriorate, there is a significant risk that government will not be able to reduce the non-interest expenditure in the budget, because it would negatively affect the economy,

Discussion
The Chairperson asked about the situation on the African continent as a whole. He gave the example of the Nigerian economy, saying the numbers give the impression that Nigeria’s economy growing, unlike South Africa’s economy.  There seemed to be growth in the Sub-Saharan region -- what was the difference between that region and South Africa?  

Mr De Beer said that the in the national budget, a lot of money is given to infrastructure development. The idea is that infrastructure development will create jobs, and so the money is divided nationally and among provinces. His question was whether provinces were making effective use of the money given for infrastructure.

The Chairperson said that there were committees of appropriations and finance, and he wanted clarity as to the difference between the two. He asked about the difference in areas of focus. It may sound like an obvious question, but it was something that needed to be clarified.

Mr F Essack (DA; Mpumalanga) asked about the budget deficit. When the PBO talks about a higher budget deficit, at what point in time -- in terms of making a quality business decision -- is the line drawn in budgeting?  Was it acceptable for the budget deficit to increase, say, for three years in a row?   What happened when assets did not cover the budget deficit?  At what stage is action taken?

Professor Jahed said that India and China have an interest in the resources of some of the countries showing growth, and that interest turns into investment.  Countries need to assess whether it is worth having their resources taken out for the sake of investment, when it could bed at the expense of the environment. Since 1994, there has been a focus on infrastructure development which is supposed to kick start the economy by creating jobs.  Another leg for spending has been in social development, giving 25 million people access to social growth. There has been a focus on the social sectors, such as providing health care.  If the government’s approach to economic growth does not lead to development, the government needs to revise its fiscal framework. That is something that the Committee must keep in mind, because it is the legislature that provides direction for South Africa.

On the of the budget deficit, he said that in the past if one had R100, one would spend R100. Now the concept is that one can spend more than that, but when the Committee makes such a decision, it must understand that when it has budget deficit, it should ensure it is investing in projects that are more productive. Oversight, especially on infrastructure, is addressed at thr national level, not at provincial level.  The oversight function involves more than merely departmental oversight -- it is about driving the economy and making decisions that affect the country.

Mr Rashaad Amra, Economic Analyst, PBO, said that South Africa’s economy is a very integrated with the rest of the world. South Africa exports a fair amount, but as a consequence of being active in the world economy, that unfortunately means that what happens in the global economy, affects South Africa.  China and Europe have been struggling and South Africa, Turkey, Indonesia and Argentina have been experiencing slow growth. Importing more than exporting creates a deficit in foreign currency, which decreases the value of the Rand. An example is mining, although this is an international problem.   Mining has been performing poorly, with the strikes and energy problems. These are systemic issues that are on going and that weaken the Rand.  However, there has been a fantastic yield on maize, which is a good influence on the Consumer Price Index (CPI), although it is important to note that there have been blockages in ports because of questionable infrastructure.

Mr Sean Muller, Economic Analyst, PBO, said that the growth of the Nigerian economy was a statistical issue. The Nigerian statistics had underestimated the size of their economy, so when the real size was calculated it seemed to grow. Experts say that the implications for South Africa are not something to worry about. Nigeria has a much larger economy, but if one looks at a per capital analysis, South Africa is better off.  In some sense, it could be hoped that the Nigerian economy would surpass South Africa in size, rather than sophistication. The only issue is that foreign investors may look at GDP size, and see that Nigeria is larger.  However, so far there is no indication that investment has been diverted.

Mr Dumisani Jantjies, financial analyst, PBO, said that he was from the North West Province and when speaking with colleagues about the budget deficit at a provincial level, he tells them that the issue is what they use the money for.  If they borrow money and use it to buy food, then they have a problem. However, if they buy an asset, that asset will pay for itself.  As such, it is an issue of balancing out what one must buy to pay for something and what one must buy for other types of consumption. At local government level, they often borrow for goods and services, which they do not get money back for. However, if they improved water treatment plants, they would guarantee getting their money back.

Ms Mmapula Sekatane, Analyst, PBO, explained the separation between appropriation and finance. Finance focuses on national issues, while appropriation focuses on spending issues and related legislation.  The budget allocation that the Appropriation Committee worked with accounted to 50% of the total budget, the other 50% is outside the budget.

The Chairperson referred to the backlog problem at ports, and wanted to know what impact it had on economic activity.

Mr Muller said that he could say a bit about that concern, because he has a background in transport matters. Developing South Africa’s infrastructure network has been an on-going process. Since the 2000s, government has been working to ensure importers and exporters have sufficient transport capacity. In many instances, it was not possible to meet demand.  The Committee should look at actual expenditure by the national treasury.  Problems with shipping ports, or trucks for exporters, can constrain growth.

The Chairperson thanked PBO for the presentation.  He said that the more knowledgeable the Committee are, the more it increased their oversight capacity. The relationship with budget office is an important one, because the office will give its own assessment from an objective and professional point of view. It will advise the Committee on how to probe progress and display the impact of the budget for appropriations more clearly. One thing is to look at a plan; the other is to look at outcomes. As such, he welcomed the relationship and the proposal for robust oversight. Oversight must not be done disrespectfully, but must be done thoroughly and unapologetically on issues that the Committee had to probe.

Mr V Mtileni (EFF, Limpopo) said that South Africa must check the downgrading or assessment of its economy, and establish how other countries calculate the numbers. One hardly hears about assessments of the economies of the G5 countries.   With regard to Nigeria, he wanted to know who determines which country is better than the other.  Was it fair to say that South Africa is not doing well economically?  Who says that country X is not doing well, but country Y is doing well – is it an assessment by the World Bank or the International Monetary Fund (IMF)?  When those two institutions do the assessment, they have wealthy and G5 countries in charge. According to their assessment, most African countries are not doing well economically. He wanted to know how they establish the ratings.

The Chairperson asked who those agencies were, if they were credible institutions and how other countries recognized the agencies.

Professor Jahed said that information was important and one of the reasons for having a budget office is to provide information. Growth rates are a standard indicator, and it is measured across the world. In South Africa, Statistics SA, the Reserve Bank and universities measure the growth rates. The African Development Bank and the United Nations Conference on Trade and Development (UNCTAD) do the statistics for the continent. Internationally the IMF, the World Bank, the United Nations (UN) and the CIA have statistics. Actually the CIA has a website with all of the statistical analysis.

Mr Ellse said that the rating agencies are independent institutions, and their websites have an in-depth analysis of their methodology. An important point is that assessing a country’s economic performance is not necessarily the problem; the focus is more on credit assessment.  Analysis of the credit-worthiness of a government or institution measures the likelihood that they will default, which is the information that investors are interested in. They certainly got it wrong at times.

Professor Jahed said that investors use the statistics to see if they will invest in Nigeria or South Africa, so that is the problem. The focus should therefore not be on how we look at it, but why someone would invest a dollar in Nigeria and not South Africa.

Mr Mtileni said that South Africa is a leading provider of mineral resources, such as gold and platinum, to G5 countries. If one checks the resources that South Africa actually exports, it is supposed to be among the main exporting countries.

 
The Chairperson said that Nigeria has 150 million people, as opposed to 50 million people in South Africa. However, based on some of the issues that are being raised, he asked what South Africa should do in regard to proposals in the New Growth Path (NGP) on building new industries. He wanted to know how the Committee should address the issues of job creation, inequality and poverty. He said there was not a lot of room for discussion, but he did not want to discourage the department from answering.

Mr Jantjies said that he wanted to give the Committee confidence that South Africa is doing well. When one compares South Africa with other countries, South Africa has good infrastructure.

Professor Jahed said that Africa had 850 million people and more resources than India and China together, but the African people are poor. They have gold mines, but they are a poor continent. These are some of the issues that the Committee must engage with when looking at a budget

Concluding Remarks
The Chairperson said he felt much more free to engage the Department. The presentation also pointed to pertinent issues regarding economic and fiscal review. It is important to engage with the issues deeply.   Many countries, like Korea, focus on human capital and sorting out problems. South Africa needs to see if it is positioning itself correctly.  He wants to discuss the issues and how they can position themselves better. The graphs and explanations in the presentation were helpful.

The meeting was adjourned.