Medium-Term Budget Policy Statement (MTBPS) 2015: Parliamentary Budget Office review

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Finance Standing Committee

27 October 2015
Chairperson: Co-Chairpersons: Mr C De Beer (ANC; Northern Cape), Mr S Mashatile (ANC)
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Meeting Summary

The Parliamentary Budget Office provided an analysis of the Medium-Term Budget Policy Statement for 2015 to a joint meeting attended by the Standing and Select Committees on Appropriations and the Standing and Select Committees on Finance.

The Parliamentary Budget Office generally echoed the concerns contained in National Treasury’s budget policy statement, although they indicated that forecasts conducted by the International Monetary Fund have predicted that growth will be lower than the predictions offered by National Treasury. The IMF expects growth to slump to 1,3% next year, while the National Treasury had predicted 1,7%.

Budget Office indicated the recent changes in what is viewed as an acceptable threshold for debt as a percentage of GDP. Previous estimates of 46% have recently been expanded to 50% with forecasts for further expansion of this.

On higher education and the 0% fees increase that will take effect from January 2016, the PBO indicated that based on information from the National Treasury and the Department of Higher Education, universities would be able to manage the rest of the fiscal year with their cash flow unchanged by the legislature or through external funding.

Members were concerned about the role of the public service wage bill in the expenditure and revenue processes of the government. It has grown exceedingly fast, and PBO agreed that government has grown faster than the private sector as an employer over the past six years. This can be a worrying indication for future economic growth. There appeared to be broad consensus amongst Members that funding provided to the sector of higher education has not increased proportionally with the increases in enrolment in this sector. Members  said that this is the chief reason for unrest, and should be addressed as soon as possible.

The PBO presented Members with information from DHET’s admittedly speculative costings for the various options for the NSFAS funding scheme,

Ultimately, PBO said that the Committees should evaluate whether the framework and suggestions offered in the Medium Term Budget Policy Statement are in line with other policies that the government must adhere to. The role of PBO is to empower the Committees to make well-informed decisions, not to recommend a plan of action.
 

Meeting report

Mr C de Beer (ANC, Northern Cape) referring to the nationwide student protests, said that the Committees were meeting at a time of outcries for government accountability.

Medium-Term Budget Policy Statement 2015: Parliamentary Budget Office (PBO) review
Prof Mohammed Jahed, PBO Director,  explained that the role of the PBO is to provide Committees with technical support to better understand fiscal and other systems. The oversight function of Parliament is in this way empowered by the PBO. The MTBPS includes a revised fiscal framework, a proposal for a three-year fiscal framework, an explanation of the micro and macro position, as well as a discussion on the country’s debt outlook. The National Development Plan (NDP) and the expenditure outlook were also addressed.

PBO recognises the difficult position of the state, in which a large amount of resources is required for development, which the state does not have access to.

Mr Rashaad Amra, PBO Economic Analyst, said that SA has not yet recovered to pre-crisis economic growth levels. Over 2015, SA only grew 1,5%. This is due to both domestic and global factors, including slower global growth, a slow-down in the Chinese economy and lower commodity prices; and, domestically, poor manufacturing and mining performance and structural aspects such as electricity supply affect the economy.

The National Treasury’s targets have been reduced but there is a difference between Treasury’s analysis of growth as 1,7% compared to analyses by the IMF and the World Bank, which indicate only 1,3% growth.

Keeping with last year’s MTBPS, National Treasury has decided to maintain focus on debt as a percentage of GDP. It aimed to reduce this percentage, but growth has not occurred at the levels expected which has led to failures in the proposed debt repayments. The budget deficit was expected to fall from 3,3% in 2016/17 to 3% in 2018/19 according to National Treasury. This was significantly slower than previous projections from last year’s MTBPS and projections from this year.

Expenditure and revenue options
Expenditure can be classified into different areas, and spending has grown specifically in both interest expenditure and the wage bill in recent years. This may have squeezed out goods and services spending, and this may not be the picture SA wants to see as a state looking for cooperation with the private sector. Predictions of the wage bill causing problems with the budget have proven correct, as National Treasury had made allowances for increases of the wage bill linked to inflation, but in the end increases were settled at 10,1%, which was 4% higher than what was funded for. To fund this, the National Treasury has had to use all of the contingency reserve. This means SA is less equipped to deal with other contingencies.

The revenue outlook has been revised downwards compared to the 2015 budget, due to changes in the corporate income tax. Higher personal income taxes were received over the recent financial year, as public sector wage increases and the marginal increase in personal income tax levels contributed to these revenues.

National Treasury has hinted at possible tax increases, but PBO cannot use policy adjusted revenue estimates with complete certainty. Additional priorities may need to be funded, which can change the situation. The Davis Tax Committee offers options such as increasing VAT, a wealth tax, and revenue received from mining royalties. Earmarked taxes have caused issues of funds building up in certain sectors while other sectors struggle to make ends meet.

Debt sustainability
Dr Seán Muller, Acting Deputy Director of Economics, PBO, said that the MTBPS puts debt at the centre of its framework. National Treasury forecasts are different to those conducted by the IMF, as the IMF analyses forecast for much higher levels of debt for the next few years. The IMF forecasts for lower GDP growth also affect these predictions.

Debt sustainability is a serious issue for the medium term fiscal policy, and it is important to think about whether government will be able to pay its debt without drastic measures. If there is a sustainable debt threshold, where does SA lie in relation to this? The Minister of Finance implied that a 50% threshold is appropriate in his MTBPS speech last week.

Experts differentiate between debt thresholds and debt targets. A threshold should not be exceeded, because of the undesirable risks and effects on economic growth. A target is something the state strives towards, and will usually be determined for both the medium and long-term.

If the IMF proposals are accepted, this would mean that the government would have to raise more funds to prevent any additional borrowing. This would be done though tax increases or other measures, which could have a significant negative effect on economic growth, and inherently state revenue. These issues are a debate many countries find themselves in at the moment.

National Treasury has adopted a new fiscal rule of thumb, which is to guide the planned expenditure of government in the outer year of the MTBPS estimates. This more transparent approach will be linked to keeping government expenditure as a constant proportion of GDP. This approach is much more transparent than previous approaches, and will also keep government accountable and consistent. It is also counter-cyclical and will use the long-term rate of growth as an aim instead of short-term fluctuations. The proposal allows for flexibility related to inflation, and this will mean more power to adapt to some changes. New policy proposals that need additional funding could also change things significantly.

However, there are significant differences in the forecasts and outlooks of various institutions and it is not clear which datasets National Treasury will rely on and use for its policies. These approaches may also lead to a lack of flexibility, as the countercyclical nature of the targets may lead to their adoption in spite of poor performance.

Ms Nelia Orlandi, PBO Policy Analyst, said that the MTBPS addressed issues of education, skills development, health, social protection, and infrastructure using a nine-point plan. The allocations for Basic Education, Health, and Human Settlements are increasing over the next year, as well as the budget for Defence. The Human Settlements and municipal funding increases are related to the improving of national health standards. There is also a large increase for expenditure related to Home Affairs.

The public sector wage agreements, a weakly managed budget, employment trends and the cost of post-school education all contributed to increases in expenditure. Estimations for worker compensation are high for this year, and departments are not implementing the guidelines suggested to them by National Treasury.

Employment trends are going down a lot slower, and last year less than 1% of government’s workforce was shed. Capital planning and expenditure has been a challenge, and the new capital framework must be implemented correctly. Transfers to households have slowed down compared to previous medium term frameworks, which will mean lower economic growth.

Shifts were made from vacant positions that have not been filled to salary level notch increments related to performance evaluation, and some salaries at level 9 and level 11 were upgraded. Transfers to departmental agencies and accounts were improved, as the transfers to University of Witswatersrand for the medical student expansion programme was the main reason for growth in this sector. The declaration of unspent funds was a problem again, as historical underspending in some departments was disregarded in the planning of contemporary budgets. Current expenditure trends are still around 70% at this time of the year, but this has not been matched by performance in many departments. Departments that spent less that 70% have also struggled to match their performance indicating targets.

SA needs to realign its baselines to achieve better correspondence between departments. Additional funds have been allocated for HIV/AIDS and TB, with better results than forecast. However, these successful initiatives also reported unspent funds. It is not clear how this can be overcome. PBO’s suggestion is to change baselines and to base budgets on recent evidence. Historic and current spending trends must be considered. Analysts and oversight bodies must provide guidance and monitor the implementation of frameworks for efficiency.

Most provinces are almost at 50%, but the Free State is at just over 50% due to overspending last year. Policies need to be aligned with the NDP and the Medium Term Strategic Framework. PBO’s attempts at this in health, education and skills development have yielded good results for health, although there are many gaps in these two frameworks. Under-reporting and inaccurate reporting of data by many departments is problematic in these areas. The indicators and targets are not aligned with the reporting of the department, and forecasted performance standards in quality basic education and many other sectors have not been achieved. Achievement is at 37% for the targets for quality basic education by the end of 2015. Only 39% of learners in Grade Nine achieved the required marks in Mathematics in order to continue, against a target of 60%.

National Treasury indicated that the social value of departmental initiatives is increasing, although many of these initiatives do not seem to be achieving their goals.

Higher education funding
Dr Muller said that higher education funding has come up a lot recently in parliamentary discussions on the MTBPS. PBO has offered an analysis on the possibilities of these concerns. The funding model and the overall funding of the National Student Financial Aid Scheme have been brought into question.

It has been stated that a zero percent increase of current fees equates to R2,6 billion foregone revenue for universities. This is based on the expected fee revenue provided by individual institutions.

It is not immediately obvious from where funding for this shortfall should come. Government transfers, cost cutting within institutions and other options exist for the sourcing of these funds. It is however important to consider the composition of the cost of attending university. The appropriateness of fee increases should talk to inflation of higher education costs.

This asks how university costs are increasing. This is necessary across all government budgeting, such as in health expenditure where inflation levels are higher than CPI. Analyses have shown that higher education inflation exceeds CPI. This refers to the costs paid by universities. This suggests that funding should increase faster than CPI in this sector. Some university costs are determined by their own decisions. Compensation of employees is approximately 55% of operational costs of universities. These are individual decisions, but also have to follow certain policies of the government and the Department of Higher Education and Training (DHET).

PBO is waiting for a provisional estimate by DHET of the revenue foregone due to the fee freeze. Fee increases before protests were between 8% and 15%, clearly above CPI. Residence fees are included in this. In the 2015/16 year, residence costs varied from R48 331 to R113 602. Based on the information they had been provided with, the PBO stated that it would appear the zero fee increase will not affect spending for this fiscal year, because universities have enough cash flow to make it through to April despite a lack of funding from February. However, the fee freeze will have a long-term effect on university revenue from fees.

There are four issues related to NSFAS funding scheme:
- The number of students satisfying the means test who are unable to access funding
- The gap between NSFAS disbursements and actual, full cost of study
- Students who do not satisfy the means test but cannot afford full costs of study
- Efficacy of the process for collecting loan repayments.

DHET has considered several different costing options, although PBO has not had the chance to conduct its own evaluations. The first scenario is to maintain the means threshold and real grant value. The expected shortfall for this scenario is R314 million for next year, and R997 million by 2017/18. The second scenario is to maintain the threshold, but cover the full cost of study for these students. This shortfall would be R5826 million by 2017/18. The third scenario is to increase the threshold while maintaining real grant value. This would lead to a shortfall of R3882 million by 2017/18. The last scenario is to increase the threshold and cover the full cost of study, which would lead to a shortfall of R9637 million by 2017/18.

There have been two ministerial commissions, one on NSFAS in 2009, and the other on funding of universities in 2013. The commission on funding found that universities should be retained as a component of funding mechanisms, and that capping of fees should not be implemented. This is due to possible negative effects on quality and cross-subsidisation. Education is a public good, with private characteristics, and funding should support people who deserve to be there but cannot afford the fees. This commission also found that government should increase spending levels on higher education, and that DHET should monitor actual costs to inform bids to National Treasury for funds.

There are concerns than total government funding has not kept pace with enrolments, and that funding increases have not reflected faster increases in higher education costs relative to inflation. Concerns were also related to SA’s spending on higher education relative to GDP, although a more detailed analysis of all of these factors is necessary. PBO would have more to say on these matters if it had more time to investigate them.

Professor Jahed said that the growth of inequality and the failure of redistribution are causing problems and unrest for this country. There needs to be more accountability.

Discussion
Mr D Maynier (DA) asked PBO whether the Committee should amend the revised fiscal framework. What is its independent view on these matters? In PBO’s view, there is no reason to amend this budget to provide for the 0% university fees increase. This will mean universities will start to incur costs at the beginning of the next academic year. PBO’s view that universities will be able to manage these costs without a revision of the fiscal framework is incorrect. There has not been enough interaction with universities themselves. Is the National Treasury’s projection for a 1,5% growth rate reliable in the PBO’s independent view, and if not how is PBO’s view different? There was no reference to provisions and contingencies of GDP changing for the next year by the Minister. Is this important? Has PBO independently verified the numbers presented by National Treasury, especially those related to debt as a percentage of GDP.

Mr M Figg (DA) asked why there was a discrepancy between the IMF’s forecasts and those of National Treasury. There has been a slow growth rate for a few years in SA, and surely expenditure should be adjusted accordingly to accommodate for this. What are the causes for the increase in interest expenditure? Does SA’s poor credit rating influence these payments? In provincial departments, the number of employees has decreased while expenditure has increased. Is there any legislation that might be affected or revised in the proposed changes to the fiscal framework?

Mr A Shaik-Emam (NFP) asked what the impacts of free tertiary education would be on the state. There is a deficiency of skilled labourers in the country, while there is ample funding provided for many training programmes. Training initiatives should be aligned with the need for skilled workers in our economy.

Borrowing has increased even though there are problems with SA’s debt sustainability. Is SA doing too much as a state and consuming irresponsibly?

What are the effects of the government’s sale of shares in Vodacom?

SA is losing something like R200 billion per year due to wasted expenditure, fraud and corruption or simply spending in sectors with no value added. Tenders are not given to low bidders as the government constantly overspends on its initiatives.

The high unemployment rate and structural problems of SA are not being dealt with by current policies. What can we change to empower the country’s economy?

Dr B Khoza (ANC) said that the presentation did not offer many different options to the Committee. Given the constantly poorly-performing economy, is SA in a recession? Is the government entering into a debt trap?

The quality of university research output has been poor in the past few years. Many students fail in their first year due to being unprepared after high school. If we cannot evaluate what the effects of our funding will be, we put ourselves in a dangerous position. What are the critical impacts the portfolio Committee should be focusing on changing? Taxpayers are already overstretched, and we don’t want to discourage those already helping the country, as well as investors.

Mr A Lees (DA) asked whether earmarked taxes should be raided for the greater good, or whether they are building up a surplus, the contributions to which should end. Should we follow the IMF’s analysis or follow that of the reserve bank or the National Treasury?
Prof Jahed said that the PBO has troubles offering its views on amendments and policies to the Committee. The PBO provides the Committee with information, which enables the Committee to make the best decision they can make.

Mr Masathile reminded the Committee that the role of PBO is to empower them.

Mr Maynier said that PBO is repeating National Treasury’s view.

PBO responses
Mr Amra said that PBO does not do its own growth projections, but it can provide a comparison with IMF and domestic forecasts. This is very useful when assessing the robustness of forecasts. The IMF seems to be an outlier compared to the reserve bank and National Treasury. Regarding the wage bill, it is important to note that provincial numbers have gone down despite the wage bill increasing. This is related to the proportion of wage increase, which was higher in the past year compared to the diminishing wage force.

The value of Vodacom shares recently sold by the government over the past three financial years was R4,48 billion. These losses are accentuated during times of fiscal difficulty. It might be possible to use corporate funds, or introduce a corporate levy that would only be used on skills development.

Prof Jahed said that GDP is a big measure that gives a good indication of increases in income and production. It is one element of economic growth. Factors such as human development are not taken into account. The assumptions of GDP evaluation are limiting in some ways.

Dr Muller replied that the PBO has had some interactions with universities, but they were informal. However, some investigations have shown that universities will be able to cope with the 0% fee increase until the start of the next fiscal year.

PBO does not make recommendations on policy, based on international best practice.

One of the options of NSFAS is for the universities to cover all fees that cannot be covered by current students for the current year. PBO has not managed to conduct a policy costing, and neither has any other institution managed to do on thoroughly.

It has become clear that funding is not keeping pace with enrolment. This does not make sense if the state wants to put more students through the system of higher education.

PBO has tried to look at the accuracy of National Treasury’s forecasts historically, but it cannot evaluate whether certain decisions are correct or not. One of the reasons for this is that they do not conduct their own primary research in many sectors, and must rely on analyses from bodies such as the IMF.

Well-informed experts around the globe are not in unison on whether middle-income countries such as SA should adopt a debt threshold of more than 50% of GDP. Different bodies evaluate these structures differently and the literature on these subjects is conflicting.

PBO does not take positions of macroeconomic policy, and it might be appropriate to redirect these questions to National Treasury. It is important to evaluate SA’s best chance for growth and debt management based on its own context.

Relating to Vodacom shares, in the 2015 budget, the amount of dividends declared by Vodacom was R1,6 billion.

Further discussion
Ms T Tobias (ANC) thanked the PBO for the presentation and asked the delegates whether it is necessary to reconsider SA’s macroeconomic policy. This is not generally the function of the Committees on finance and appropriations. Policies need to balance between growth and debt vulnerability. Government is working in a limited framework, but it still has various options in front of it. SA has serviced our debt, and has always been able to do. This means SA cannot be ranked poorly for debt sustainability.

SA needs to evaluate whether the current revenue is sufficient to achieve its goals. One of the main issues posing a threat to the state’s aims is the bloated wage bill. This is leading to diminishing contingency reserves. The Davis Tax Committee and other independent reviews indicate that a wealth tax may be an option going forward.

The inter-generational capacity of SA’s development is going to cause a problem. PBO has in fact suggested that expenditure and debt accruement should be based on growth, and it is worrying that these have not been linked for the past few years. Committees need to communicate and deal with facts on the table. One of the issues that relate to higher education is institutional autonomy, and it must be investigated whether this causes problems with funding and expenditure.

There can be unintended consequences when NSFAS is evaluated at different institutions. The entrance requirements and procedures of institutions like UCT are inappropriate, and they also decide on how much to spend on certain sectors of higher education. If departments budget for positions that are never filled, this leads to accountability issues.

At what point will the government stop wage bill increases that do not benefit the capacity of the state? The executive director of SABC earns much more than the president. Some programmes will need to be privatised, and these investigations need to be conducted to enable the country to examine the fiscal policy and make changes based on these policies.

Mr N Gcwabaza (ANC) said he wanted to check if unspent funds should be investigated further. This could relate to capacity as well as over-budgeting. The issue of the wage bill is a problem, but we must not over-exaggerate it to the extent that the government decides not to pay workers. There is an urgent need to foster efficient and effective spending.

The state is too quick to call for a cutting of the wage bill, and usually heads of institutions are not held accountable. These individuals dealing with the day-to-day implementation of policies should not be let off the hook. When attempting to find funds for issues such as higher education, it might be problematic to withdraw government expenditure, as this may negatively impact economic growth.

What other options are available to the government besides the increase of taxes? Parliament must be bold and suggest that taxes are the best means of gaining access to new funds.

The question of renewable energy must be confronted head-on.

Mr A McLaughlin (DA) said that macroeconomic policy must be the starting point for analysis. SA is the 4th worst performing economy in Africa. Why is this? Should we investigate this? This fact is not spoken about enough. What is the difference between net and gross debt? Total debt was at 43% a few years ago, and it was said that 46% would be the maximum. This recently changed to 60%, will it change further in the future? Why are defense and policing budgets increasing, while drought and water funds are falling?

Mr S Swart (ACDP) raised the question of underspending in budget allocations. This has the potential to be negative on the country and the economy as a whole. The public sector wage bill has the potential to destabilise morale and expectations of civil servants.

Mr L Suka (ANC) said that non-negotiable expenditure should be related to labour, business, and government deliverables. Should these be re-addressed? There is a need for funding of higher education and transformation in this sector. Committees need to be ad-hoc in these interventions.

With a stronger presence of external businesses, what is their role and what are their interests? This analysis has to be executed and engaged with.

Mr Figg said the President had promised a 0% increase for next academic year. Will there be a shortfall due to fiscal year beginning in April?

Mr de Beer said that SA cannot afford labour unrest, and that it needs to quickly engage with issues to avoid incurring multiple costs.

Professor Jahed said that the MTBPS presented by National Treasury must be the guideline. As an oversight function, Committees must check if this aligns with other policies. Committee members have both a responsibility and a role in determining economy. Important issues must be raised and discussed.

The wage bill issue must focus on a discussion of policies and realities within government.

Mr Amra said that we are not in recession. Lower inflation abroad has benefited us, as our higher inflation has led to real gains for SA.

A larger wage bill means less spending for infrastructure and other spending. Government needs to examine whether this is feasible. The wage bill is exogenous to government, so needs to be addressed carefully.

The public sector is not the largest contributor to employment, but has been growing faster than the private sector over the past 6 years.

The Finance Committee has to make decisions about the fiscal framework, while the Appropriations Committee organises the actual allocations. National Treasury’s analysis does acknowledge that local factors have contributed to South Africa’s low economic growth, it does not only attribute this to global factors. There are remarkably similar patterns of growth declines for other ‘middle-income’ states, such as those in the BRICS alliance.

Contingent liabilities are not publicised in MTBPS usually.

The proposed fees freeze for universities, as stated earlier, should not affect current fiscal year based on the information the PBO has been able to obtain.

Compensation budgets should be scrutinised, and provided for some measures but over the medium term, might be unsustainable. Nine-point plan is not totally in line with other policies because it regards agriculture more than other policies. Water and sanitation spending has spent 30% of its budget at this stage of this year, with R7 billion unspent.

The meeting was adjourned, although Chairperson Mashatile acknowledged that this would be an ongoing engagement.

 

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