The Parliamentary Budget Office (PBO) provided a 2016 budget overview. The role and function of the PBO was firstly explained and it was stressed that it did its work in consideration of what the National Development Plan stated were the priorities. It was noted that it was important to study fiscal trends. At different times, the country had been running with surpluses and deficits. From the late 1990s to 2007 the fiscal policy had focused on growth and redress, but from 2008 to 2014 the fiscal policy was counter-cyclical. The fiscal space created previously had now been eroded, largely due to the global financial crisis. After 2014, the country shifted to efforts to fiscal consolidation, targeting debt reduction, and this continued into the 2016 budget. Because GDP growth had slowed, so must expenditure, and the strategy in this budget tried to reduce expenditure and come up with various revenue-raising proposals. All three spheres of government had been reduced in their budgets. National Treasury had particularly targeted programs showing a history of under-spending and made readjustments so that the country would reduce its borrowing needs and concentrate on programs addressing the revised priorities, including additional funding for Department of Higher Education (R16.27 billion), the new Development Bank (R11.75 billion), Small Business Development (R474 million), Planning, Monitoring and Evaluation (R300 million). Funding was also being allocated to a contingency reserve (R3 billion) as well as to general social protection. It was important to consider, where cuts had been made, what the effect of these might be on service delivery. Some departments – such as the Department of Social Development – faced a cut overall but increases in funding for specific projects, in this case Early Childhood Development. The Department of Economic Development was not affected. Non-essential items would have reduced budgets, and it was noted that both compensation of employees and goods and services tended to show over-budgeting by departments. Transfers were problematic because large amounts were being paid to government entities, who contributed to national expenditure although the spending was not being tracked in the same way as with the departments. PBO had started a project where departments would have to show how the outcomes planned linked directly to the NDP. In relation to Government Outcome 4, there was some alignment, but there were still areas in which there was not sufficient reporting, nor was it made clear what the effect of the cost reductions in departments would be on the services provided to poor households. Without proper reporting, there could not be proper monitoring.
Members agreed that aligning budgets to NDP goals was a key to achieving economic coherence. They questioned the achievement of 45% on Outcome 4 and 46% on Outcome 6, saying it was disappointing, and asked for the achievements of other departments in the economic cluster. The point was made that with a multiplicity of departments attending to economic matters, it was important to try to reduce any duplications. Members asked how effective tax collection had been, wanted more clarity on the Strategic Infrastructure Project spending, and whether it was in principle effective to reduce budgets when there had been under spending, or if it was not more important to look at the services that could be provided with that budget. Members expressed concerns about the non-filling of vacant posts, and commented also on virements, which might seem that departments were moving money to hide it for future reallocations. Members discussed the problem of fiscal dumping and the PBO said that it was important for departments to move money across to entities in good time for them to use it. It was very important for Parliament to hold departments to account on their strategic plans and get quarterly indicators. The meetings with the Auditor-General were very important. It was suggested that the PBO take on some further research into this as a project and report back to the Committee.
2016 Budget: Parliamentary Budget Office (PBO) briefing
The Chairperson expressed her thanks to the Parliamentary Budget Office (PBO) for its quick response and willingness to assist this Committee with briefings.
Professor Mohammed Jahed, Director, Parliamentary Budget Office, stated that the aim of the briefing was to inform Members of Parliament of the need for reprioritisation taking into consideration the country's current fiscal standing.
Professor Jahed further clarified that the role of PBO was to ensure that legislative oversight was exerted over the executive. It was also established in terms of section 15 of the Money Bills Procedure and Related Matters Act (The Money Bills Act) to provide technical support to committees in exercising their oversight function. The PBO sits in the legislature to assist in the budget making, approval and legislating process. He noted that the briefing he would give today was based on one that he had prepared for the Finance and Appropriations Committees of Parliament, and he would highlight some key issues. He noted that the National Development Plan (NDP) was seen as the blueprint for the country and so he would highlight also the links to this.
Mr Brandon Ellse, Financial Analyst, PBO, stressed the importance of assessing the fiscal trends in the country. South African fiscal policy had evolved, and it was important to be mindful of the effect on the fiscal policy framework. An understanding of fiscal policy enabled a better understanding of the country’s current stance. He noted that at different times, the country had been running with surpluses and deficits. From the late 1990s to 2007 the fiscal policy had focused on growth and redress, but from 2008 to 2014 the fiscal policy was counter-cyclical. The fiscal space created previously had now been eroded, and this erosion was largely due to the global financial crisis. After 2014, there was a fiscal consolidation, where there was a target on debt reduction of 1.5% or less. The target is to reduce budget levels and stabilise debt. In the 2015 budget review, a strong shift was seen, and this continued then into 2016, which explains the current fiscal stance.
Mr Ellse explained that there was a move to linking expenditure with GDP growth. The current fiscal policy should be seen as one of consolidation. He would describe the fiscal strategy, reduction in expenditure ceilings, and revenue raising proposals, which aimed to see R15 billion coming in the next two years and a number of other growth initiatives. The question was, now that the expenditure rate had slowed down, where the cuts to balance out would occur.
Reductions in expenditure were expected from all three spheres of government. National government was to slow by 0.8%, provincial government to slow by 0.4% and local government by 2.2%. He noted that the National Treasury (NT) had set out recommendations. There had been an analysis of programmes with history of under spending, and readjustments were made there. The funds saved in this way would be put to fiscal consolidation, which meant that the country would reduce its borrowing needs. They would also be used for funding new priorities, which had been stated to include additional funding for Departments of Higher Education (R16.27 billion), the new Development Bank (R11.75 billion), Small Business Development (R474 million), Planning, Monitoring and Evaluation (R300 million). Funding was also being allocated to a contingency reserve (R3 billion) as well as to general social protection. It was necessary, when considering the cuts, to look at where the cuts had been made, how this might affect service delivery and how they might also affect economic growth.
Ms Nelia Orlandi, Senior Policy Analyst, PBO, spoke to the reprioritisation to fund priorities, and fiscal consolidation over the 2016 Medium Term Economic Framework (MTEF). She tabled a comparative slide showing those departments affected by reductions. She noted that the Department of Social Development (DSD) had underspent on its last budget, and therefore it was, overall, facing a reduction, but it would be getting additional funding for Early Childhood Development (ECD). The Department of Economic Development was not affected. There had been pressure for more funding to the Department of Higher Education, so there would be a reprioritisation of funding to here from other departments.
Ms Orlandi spoke to the issue of shifting money from one programme to another and said that non-essential items would see a cut in budget, to adhere to the current fiscal policy requirements. In relation of compensation of employees, departments had a history of over-budgeting and the same was true of goods and services too, whilst in the areas of transfers and subsides there had been a history of over expenditure when fiscal dumping occurred. Speaking to transfers, generally done under Programme 3, she noted that large amounts were being paid over to government entities, and they of course also contributed to national expenditure. The PBO had started a project where departments would have to show how the outcomes planned linked directly to the NDP. In relation to Government Outcome 4 plans, there was some alignment, but there were still areas in which there was not sufficient reporting, nor was it made clear what the effect of the cost reductions in departments would be on the services provided to poor households. Without proper reporting, there could not be proper monitoring.
Dr J Cardo (DA) commented on alignment of budgets to goals stated in the NDP, and said this would be key n consolidating economic coherence. He commented that a figure of only 45% achievements on Outcome 4 and 46% on Outcome 6 came as a disappointment. He asked for the figures for other departments in the Economic Cluster, such as Departments of Trade and Industry and Small Business Development, who would arguably have to contribute to these outcomes too.
Mr P Atkinson (DA) commented on the R1.19 billion spent, but said there had been no clarity on the Strategic Infrastructure Projects (SIPS) and thus there could not be much comment made on this. He further asked what steps were being taken to fix this, and also enquired how effective South Africa had been in collecting taxes, and whether this had resulted in increased revenue.
Mr S Tleane (ANC) asked a question around the principle of reducing budgets when money had been budgeted and unspent. He asked if there was consideration given to the reasons for the money being budgeted in the first instance, and what would happen if the budgets for those purposes were cut.
Ms C Matsimbi (ANC) expressed concern on how vacancies were not being filled and asked why this was a recurrent problem, particularly because of the high rate of unemployment in the country. She was also worried about the intention to cut according to under and over-budgeting.
The Chairperson had some comments to make to Members on the questions they had posed. She told Mr Atkinson that she had already explained the steps taken by Parliament and there had been attempts made to call the departments concerned to account. The matters were now before the House for a decision, and she, as Chairperson, could only wait the unfolding of this process. She pointed out that virements were allowed between programmes, according to the Public Finance Management Act, and that was according to rules. She knew that this could be problematic, particularly where reports were suggesting that money seemed to be “hidden” in other programs for future or later reallocation, but without the facts to prove it, it was very difficult to act on assumptions. Speaking to the compensation of employees she noted that there is a structure that illustrates vacancies which are not filled, and so some departments opted rather to use consultants or universities to assist them – and the question here was how the payments were classed – as compensation of employees, or goods and services? Clarity from the departments was needed to deal with this challenge. Furthermore, there was an assumption that money transferred was seen as “dumping” of resources on entities. Policy directives were given in mid-term and alignments needed to be done to respond to that; the same process must be followed for virements.
Professor Jahed said that the departments themselves would need to be asked these questions and asked to clarify what was happening. There were a few issues and if the strategic plans were not talking to general policies then there was a problem. There seemed to be some duplication with eight departments responsible for economic policy, so the question was how coordination of these departments would happen. Professor Jahed stated that this could be a struggle, and was something that the Committee could address.
Ms Orlandi added that the assessment of the outcomes was not yet complete, for there are still two more to be done. For Outcomes 4 and 6 the outputs were achieved by entities. These were not reflected in the MTEF, whose indicators related to the departments and not to the entities. It would be important to get quarterly indicators from entities. The PBO was busy with the NDP project, and a publication would be released and distributed with further information.
Ms Orlandi also noted that National Treasury had given some indication of the SIPS for the first time. Departments could surrender funds or they could also ask for a rollover for the next year. Funding surrendered to NT would be re-allocated.
Mr Ellse referred the Committee to a slide which showed revenue estimates and actual revenue, and this showed that often, the actual revenue figures were lower against the estimates which was why the country found itself in the current fiscal state. However, interestingly, the 2015/16 tax revenue was projected to be higher than the estimate. He pointed out that revenue and Gross Domestic Product were closely linked so that when GDP slowed, so would revenue.
Ms Orlandi also spoke to the Chairperson's comment on fiscal dumping and virements. The PBO was advocating trying to avoid any dumping at year end. It was hard for some entities to spend money. The PBO would ideally like to know upfront that the budget was credible, with money being allocated to entities in time, so that they could and would plan for, their projects.
The Chairperson asked if Ms Orlandi was suggesting that this should be an additional amount, or a normal allocation being transferred in tranches.
Ms Orlandi clarified that it would be a normal allocation, against the baseline.
The Chairperson asked whether the request to reallocate would be a one-off, and whether it would affect cash flow at the end of the day.
Ms Orlandi said it would not; it would already have been allocated at the start of the year.
The Chairperson commented that she thought the issue was that departments were holding back from allocating money to entities, but Ms Orlandi seemed to be indicating that the issue was that the additional money was being released too late to be properly spent.
Dr Cardo asked for clarity on the period of review around the 45% and 46% achieved, that were mentioned in relation to Outcomes 4 and 5 respectively.
Ms Orlandi responded that the targets were compared with outcomes in the review of the year.
Ms D Rantho (ANC) said that she did not clearly understand the issue of dumping at the end of the year, for she recalled having seen comments in the Auditor-General's reports about money being redirected to certain entities or programs.
Prof Jahed clarified that fiscal dumping referred to the situation, which happened in many departments, where the departments made limited progress and did not spend as expected for most of the year. Then, because they wanted to make sure that their budgets would not be cut for the following year, they would re-allocate the budget to other programmes in the last quarter to make it look as if spending had occurred. The point was really that quarterly evaluation would prevent this, and there needed to be ongoing monitoring and evaluation. Updates about the entities were obtained from the departments, not the entities, but because it was the entities actually doing the delivery, there was a need to see how their budgets stood. Some departments did try to use the PBO to lobby for more resources.
The Chairperson said that it was very important to get the right facts from the departments, and also meet with the entities to get their own reports. She commented that Ms Rantho’s question related to a point asked of the Auditor-General in relation to the last financial year, where re-directed amounts had been picked up. However, there was still some uncertainty about fiscal dumping, and she asked to what extent it was actually happening, and whether there was a need to retain money, and stressed the need to follow up when the Auditor General raised issues.
Ms Orlandi suggested that it was preferable to have funding transferred at the beginning of the year, to enable the entities to spend, rather than waiting until the end of the year, when they would not be able to do this.
The Chairperson accepted that point, but still maintained that there was a need to get clarity on the point. seen as in order as the Committee meets with the auditor general, where in the previous financial year the certain amount that was reallocated from a certain directive was immediately picked up.
Prof Jahed suggested that the PBO take this on as a project and report back to the Committee.
The Chairperson agreed and requested that the PBO offer its assistance on a quarterly basis.
The meeting was adjourned.