2014 Medium Term Budget Policy Statement: Financial and Fiscal Commission & Parliamentary Budget Office briefings

Standing Committee on Appropriations

29 October 2014
Chairperson: Mr P Mashatile (ANC)
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Meeting Summary

The Joint Meeting of the Standing and Select Committees on Appropriations heard briefings from the Financial and Fiscal Commission and the Parliamentary Budget Office on the Medium Term Budget Policy Statement (MTBPS) 2014.

The Financial and Fiscal Commission gave an overall assessment of the MTBPS. It covered the consolidated fiscal framework, the non interest allocations of the Division of Revenue, the provincial share, the local government share, adjustments to conditional grants, expenditure prioritisation, and a review of actual spending, adjustment estimates and rollovers.

The Parliamentary Budget Office identified and analysed the key issues of the MTBPS. It looked at the external and internal factors affecting South Africa’s reduced growth performance and outlook and its effect on the budget and fiscal package and the need to ensure debt sustainability. Government's decision to reduce the budget ceiling by R25 billion over the next two years had implications for expenditure. The MTSF and NDP must be implemented within a constrained fiscal environment. The implications for State Owned Enterprises (SOE), for the public sector wage bill and for the provincial and local government equitable share were also analysed. The assumptions, risks and implications of the fiscal policy were looked at. Oversight would be critical to ensure efficiency and value for money. The avenues for increased revenue collection were considered as well as cost containment measures.

Members requested a list of departments that delayed the transfer of grants to provinces and municipalities and asked what caused the delays. What caused the under spend in local governments? Members raised a number of questions and concerns. The decreased expenditure ceilings would have a serious impact; what was the cause of the decrease in municipal revenue? The economic growth forecast was decreasing yet there was a sudden forecast of a 2.5% growth, was this being optimistic? Would the MTBPS stimulate growth, as there was concern that growth would be constrained and deteriorate. Members agreed that provinces should drive economic activity higher but given the NDP how did one align one’s budget to that goal? Regarding the nuclear power station build programme, portfolio committees should be briefed before the President decided, as Committees should not be rubber stamp committees. Did the FFC make recommendations on how money was to be collected? What lessons could be learnt from Nigeria and Brazil’s growing economies? If growth did not happen as planned were there any contingency plans? What was the impact of another 1.4% growth rate? The Auditor General was not able to collect its fees from local government because they struggled to pay, so the funding model needed to be looked at. The view was that government remained challenged on the issue of State Owned Enterprises (SOE), was there deterioration in these institutions and was there a call to overhaul them? Why was there not one database system for all public workers? Expenditure on post schooling appeared to paint a gloomy picture. How would the economy change without more graduates and technicians being developed? Perhaps the fiscal framework needed to be approached differently.

The director of the Parliamentary Budget Office said the issues for the Committee’s consideration were:
- What economic objectives were being set out for the future in the MTBPS? The MTBPS was a policy statement not a mini budget.
- Were the economic objectives the Committee wanted in the MTBPS?
- Did the MTBPS give vent to a potential budget for a certain policy to be achieved? For example, did the MTBPS have a policy on post school spending?
- Would this MTBPS be taken forward or did it need to be relooked at?

Members were concerned about the constant budget deficit and asked what would happen if South Africa took the USA route of increasing its debt. With a 40% debt to GDP ratio, the tax base should be expanded to increase revenue collection. Could developing countries push their debt levels to 50%? 

Meeting report

Financial and Fiscal Commission (FFC) presentation
Dr Ramos Mabugu, Research Director, spoke to the consolidated fiscal framework. It was time to review the provincial fiscal framework and provincial economic development had to be better appreciated. The local government equitable share was rising at a greater pace than even the budget but the challenge was the fiscal capacity of municipalities, which varied and was declining over time. The FFC had done a comprehensive review of conditional grants and two recommendations had been implemented. Municipalities were under budgeted and were under spending the under budgeted allocation. On a positive note, rollovers had continued to decrease from R1.5 billion to R894 million.

Mr Bongani Khumalo, CEO, said the theme of the Commission’s submissions was balancing fiscal sustainability with socio-economic impact. The MTBPS was crafted in a constrained environment characterised by downward economic growth forecasts. There was a need to get value for money from Government programmes. The Commission agreed on the fiscal consolidation and tightening measures in the MTBPS to maintain expenditure sustainability. He drew attention to rollovers for the Department of Energy that exceeded the PFMA threshold limit. The economy was far below the economic growth rates required to make a dent in unemployment figures.

Parliamentary Budget Office (PBO) presentation
Mr Sean Muller, PBO Economic Analyst, identified and analysed the key issues of the MTBPS. He noted the external and internal factors affecting South Africa’s reduced growth performance and outlook and its effect on the budget and on debt sustainability. Government's decision to reduce the budget ceiling by R25 billion over the next two years had implications for expenditure. The MTSF and NDP would have to be implemented within a constrained fiscal environment. The implications for State Owned Enterprises (SOE), and the financial challenges that some of them faced was looked at.

Ms Nelia Orlandi, PBO Policy Analyst, discussed the implications of the fiscal policy shift for the public sector wage bill, the first five-year implementation phase of the NDP as the 2014-2019 MTSF, spending priorities, opportunities for enhanced effectiveness, and implications for the provincial equitable share (see document).

Discussion
Ms S Shope-Sithole (ANC) requested a list of departments that delayed the transfer of grants to provinces and municipalities. She asked what caused the delays, and what caused the under spend in local governments?
Mr M Figg (DA) was concerned that decreased expenditure ceilings would have a serious impact.
What was the cause of the decrease in municipal revenue? What were the FFC recommendations, because bodies were spending money with no technical capacity? Why was there a discrepancy between the FFC’s figures in slide 17 and that of the Human Sciences Research Council (HSRC)’s figures? Were the figures in slide 19 correct? The economic growth forecast was decreasing yet there was a sudden forecast of a 2.5% growth, was this being optimistic?
Mr Khumalo said he could not defend the national growth forecast figures; that was for Treasury to answer.

Regarding expenditure ceilings to stop debt increasing, one needed to look at a programme and its relative importance. NDP programmes targeted the poor and were not impacted or, if impacted, then not as much as other non-core programmes.

Regarding the wage bill, if targets were exceeded then internal trade offs would have to be done by that department. No more money would be given.

Regarding municipal revenue, there had been a growth in transfers to municipalities but municipalities had accumulated big debts because of a lack of services or revenue collection. The FFC did a study in 2012 on revenue collection and found that municipalities were under collecting. With job losses more people were not paying for services and the global crisis reinforced this reduced revenue collection, apart from the billing challenges municipalities faced.

In terms of recommending increased transfers to municipalities, given the lack of skills at municipalities, he said the ‘back to basics’ programme launched at Gallagher Estate was an acknowledgement that little value for money was received from monies transferred to municipalities. The focus was now concentrated on municipalities doing simple things correctly first. The role of the provincial and national government to capacitate local government had to be brought to the fore.

On the discrepancy regarding the HSRC’s figures, Mr Mabugu responded that was because the HSRC used total expenditure while the FFC used non-interest expenditure.

The figures on slide 19 were correct as obtained from Social Security. The difference of three percent were two different problems in the Medium Term Budget Policy Statement (MTBPS). In slide 20 what was not used went into the reserve fund

Ms Orlandi said current spending transfers were on 49% and provinces were on 49.7% so there was no under spending.

Mr S Mohai (Free State-ANC) asked if the MTBPS would stimulate growth, as he was concerned that growth would be constrained and deteriorate. He agreed that provinces should drive economic activity higher but given the NDP how did one align one’s budget to that goal?

Mr C De Beer (Northern Cape-ANC) said that South Arica would be impacted by global circumstances. National Treasury had approved rollovers for 49 out of 200 municipalities and, given the impact of holding back the money, municipalities must be given the rollovers. The FFC assessment report on local government growth should be passed on to the Committee.

Regarding the ‘back to basics’ programme it was crucial that councillors and Members of Provincial Legislatures (MPLs) had a copy of the document.

Mr V Mtileni (EFF-Limpopo) asked if the money to fund university education through NSFAS was a loan or a bursary. Regarding the nuclear power station build program he had mentioned the day before, he said portfolio committees should be briefed before the President decided. Committees should not be rubber stamp committees.

Mr A McLaughlin (DA) asked if the FFC had made recommendations on how money was to be collected; what was meant by the term ‘cost of employment’; and what lessons could be learnt from Nigeria and Brazil’s growing economies? If growth did not happen as planned were there any contingency plans? What was the impact of another 1.4% growth rate? Why was the payment of capital goods underspent?

Ms Shope-Sithole said the Auditor General was unable to collect fees from local government because they struggled to pay; the funding model should be looked at.

Mr Mohai said the view was that government remained challenged on the issue of State Owned Enterprises (SOE). Was there deterioration in these institutions and was there a call to overhaul them?

Mr Figg said he was unsure about comparisons of South Africa with other countries. He would have preferred that the comparison be with one country similar to South Africa. Why was there not one database system for all public workers?
Mr Mashatile said expenditure on post schooling appeared to paint a gloomy picture. How could the economy change unless more graduates and technicians developed? Perhaps the fiscal framework needed to be approached differently.

Mr Khumalo responded to the question that, given a tight fiscal envelope, what were the implications for growth. There were structural and non structural factors: the global economic recovery and risks beyond South Africa’s control, as well as controllable outcomes domestically in education and health to and bottlenecks such as aging and poor infrastructure. The maintenance and replacement of infrastructure was a key element in the programme to counteract the global economic crisis.  Another issue was the institutional process around labour and that NEDLAC should be very strong to implement the social compact.

Mr Khumalo added that the documents Mr De Beer had requested were actually annual submissions by the FFC on the role of provinces and on the role of municipalities and economic growth.

Prof Daniel Plaatjies, an FFC Commissioner, said one had to look at chapter four of the MTBPS on expenditure priorities and the division of revenue, showing the links to the priorities and in turn to the NDP. 

One could say there was a slow transformation over the past six years. Some provinces were able to centralise planning in the premier’s office and into outcome based systems. There was currently a disjunction between national policy statements and its translation at provincial level. If there were no fiscal base then they would not for example be able to track revenue collections. There was a need to connect economic activity at the macro and micro level. The Gautrain issue was essentially a national bailout of Gautrain.

Other forms of stimuli that could be considered were municipal rates and taxes. Of concern was that one still had national and provincial not paying municipalities their payment requirements? Municipalities could provide investor friendly environments for companies to be located there, but this required a strategy aligned to the NDP and the MTBPS framework. Given the current fiscal constraints and lack of funds it was going to be hard for provinces to squeeze their budgets. There was a need to find a solid multi year agreement within the fiscal projections of the country.

Regarding Mr Mcloughlin’s question, he said the standard breakdown for components was the cost of employment. There were 2.4 million public servants, of which 2 million were in national and provincial government.

Prof Plaatjies stated that one would not get a single public service unless the definition of a single public service was clarified. He asked if municipal officials public servants given the current disparity in salaries?

Dr Mabugu said the cost of employment comprised gross wages and salaries, cash allowances, bonuses and medical aid type inputs.

One decreased the capital intensity of the economy through structural re-allocation. The economy was now a services economy yet capital intensity for services was high. The South African agriculture and mining sectors were very labour intensive. Capital intensity in mining had decreased but commercial agriculture was more capital intensive. The FFC did revenue and debt studies.

Regarding what macroeconomic intervention could be used when an economy was on a slide, Prof Mohammed Jahed, Director of the Parliamentary Budget Office (PBO), responded that one could spend their way out. Issues for the Committee’s consideration were:

- What economic objectives were being set out for the future in the MTBPS. It was a policy statement not a mini budget.
- What were the economic objectives in the MTBPS?
- Did it give vent to a potential budget for a policy to be achieved? For example did the MTBPS have a policy on post school spending?
- Would this MTBPS be taken forward or did it need to be relooked at? These were issues the Committee had to consider.

Mr Muller said Treasury has taken a conservative approach to debt.

 

There had to be adequate performance by municipalities but the MTBPS acknowledges that “effective responses will distinguish between technical infractions and illegal activity”.

Regarding the NSFAS funds, there is a tension in the design of the system: funds are given to students who cannot afford tertiary education but then they are expected to pay these back. That assumes that they are in a position to do so. This is a challenge faced by such systems in other countries as well. If the payback requirements are unreasonable then the system would need to be redesigned.

Unforeseen and unavoidable expenses provide government with flexibility to address unforeseen issues. An example is the use of funds for Ebola monitoring and screening measures.

In response to Mr McCloughlin’s question regarding the R27 billion more that would be required over two years, this does already incorporate the expected lower revenue collection due to the reduced economic growth forecast.

Regarding Mr Figg’s question about how comparator countries were chosen, Muller said there was no consensus on the term emerging markets. One graph used the IMF’s definition of emerging market economies. In general countries are chosen because they are context appropriate.

On contingency plans in the event of lower growth than has been forecast, one view is that Treasury has incorporated the risk by keeping debt to under 50%.

Ms Orlandi said 25% of the provincial budget was made up of conditional grants and 70% was equitable share. Three to five per cent was own revenue that could be used by provinces for priority items.

In response to Mr Figg’s question, there was one system for personnel numbers, Persal, but as not all departments are on Persal the other systems do not interface to provide one database.

 Dr Dumisani Jantjies, Financial Analyst, explained that there was a lack of stability in governing structures in various SOEs due to the constant change in leadership and management. It takes on average  two years for a new leader of an SOE to understand an institution.
 
Mr Mashatile asked what would happen if South Africa took the USA route of increasing its debt.

Mr Muller said the rules were different for South Africa compared to some developed countries. The USA’s debt levels were higher but South Africa was a smaller economy and had volatile capital flows.

Mr Mashatile asked if developing countries could push their debt levels to 50%?

Mr Mabugu replied that it was critical to look at the size of the deficit and the size of the economy. In the past South Africa had growth rates of 4.2% and now only 1.4%. It was not about the money in the system but about the productivity of the money in the system. Debt would not sort out the growth rate, so the focus should be on productivity. In 2004 when South Africa had high growth rates it was under borrowed.

Prof Mohammed Jahed questioned whether the debt to GDP rate should be limited to 50% for South Africa. Calculations had to be done as he did not believe that South Africa had pushed the envelope far enough. The services sector was the largest sector of the economy because it contained the most skilled people while manufacturing and mining were declining and contained many unskilled workers and these sectors accounted for most of the unemployment.

Mr N Gcwabaza (ANC) referred to the matter of labour intensity versus capital intensity. IPAP had been introduced in the fourth Parliament and sectors were identified which would increase job creation. Had the job creation incentives in these sectors worked? The jobs fund was created to create new jobs. If jobs were not being created new ways should be suggested. Was the private sector playing its role in creating jobs using the jobs fund?

Mr Figg was concerned about the constant budget deficit. With a 40% debt to GDP ratio, the tax base should be expanded to increase revenue collection.

The meeting was adjourned.
 

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