Pre-Medium Term Budget Policy Statement (MTBPS) briefing by Parliamentary Budget Office

Meeting report

Chairperson Phosa opened the meeting and welcomed all present. She said the intention of the brief and the engagement was to prepare members for discussions on key issues in the macroeconomic environment informing the 2016 MTBPS and current progress made with the implementation of the 2016 budget. She highlighted that South Africa faced exceptional global and domestic economic conditions and this may remain so over the next several years. To expand the social wage in a sustainable manner, create jobs and reduce poverty, South Africa needed much faster rates of inclusive economic growth.

Chairperson Phosa felt that government recognised that it could not address South Africa’s economic and development challenges alone and everyone had to work together to achieve more. She wanted a fruitful engagement on this very important briefing as it was important to achieve on the objective of this meeting. She then accepted apologies from the secretariats of the various committees.

MTBPS briefing by the Parliamentary Budget Office (PBO)

Prof Mohammed Jahed opened the presentation with an introduction. He said the PBO provided independent objective advice and analysis to the Appropriation and Finance Committees of Parliament. It related to money bills and any other bills with financial implications. The presentation was to assist members to make decisions. He said it would provide members with the macroeconomic environment informing the 2016 MTBPS, current progress made with the implementation of the 2016 budget and preliminary results of Metros for 2015/16. He trusted the presentation would assist members to make informed decisions, and added that PBO would make a presentation on the post-MTBPS analysis as well.

Mr Seeraj Mohamed, Deputy Director: Economics, PBO talked about the global and South African context which affected the economic climate. He explained the global crisis and its aftermath provided an organising perspective for thinking about the current economic situation. The period before the global financial crisis was a period of increasing levels of debt in the global economy. He noted that from the 90’s onwards, global liquidity that fed into debt markets allowed asset prices and bubbles to form in real estate, and financial markets, etc. This led to GDP growth and higher levels of aggregate demand, economic activity and fixed investment, trade and concentration along global value chains and volatility in currency markets and exchange rates.

He highlighted that the impact of increased debt extension to the private sector varied across different countries based on how they used their debt, for example China and many Asian countries increased investment and exports. USA, Latin America and South Africa had increased debt-driven consumption and speculation in financial and real estate markets. The global financial crisis led to a process of debt deleveraging and low GDP and stimulus activities had limited impact. The current global situation was one of uncertainty that discouraged investment in the real sectors of the economy. It also created experimentation and unconventional macroeconomic policies.

He gave a history of the fiscal policy environment. The macroeconomic goals of most countries focused on full employment and fiscal policy led monetary policy in the post-World War 2 era. Since the 1980’s, macroeconomic goals shifted towards price stability and inflation and monetary policy led fiscal policy. Since then the orthodox approach was to say Government influence on the economy should be driven through monetary policy and not fiscal policy. The developed countries, over last few years’ made attempts to use fiscal policy in their recoveries from the global financial crisis. At a global level, particularly in developed countries the focus was not on Consumer Price Index (CPI) but rather on concerns about deflation. The concern was about asset price inflation and not consumer price inflation. He highlighted it was important for government to think about policies in developed countries and consider our responses because South Africa was on the receiving end of quantitative easing and huge amounts of liquidity put into the Central Banks.

Mr Mohamed said there was a discussion available in the appendix which referred to a study done looking at the impact of a sovereign downgrade on the South African economy where it would fall below investment grading. The International Monetary Fund revised global growth from a 3.4% forecast to 3.1%. In addition, sovereign credit downgrades in 2016 were headed for a record. Up to July, Fitch downgraded 14 countries, S&P 16 countries and Moody’s 23 countries.

With regards to the South African economic context, the period of relatively high economic growth before the economic crisis was unsustainable. Credit extension to the private sector increased by 23% of GDP from 2000 to 2008 but private business investment increased by only 4% of GDP. Most credit to the private sector was for debt-driven consumption, speculation and base erosion activities. He said the economic growth path, investment and employment was driven by these activities and the global crisis and debt leveraging put an end to this type of GDP growth. Prospects for household consumption and private investment was low therefore government and public investment was required for GDP growth.

Mr Mohamed noted that South Africa’s growth outlook worsened since the tabling of the Budget review in February 2016. It was estimated that South Africa would experience its lowest annual GDP growth in five years due to low growth to date, a poor outlook for investment and private consumption, fiscal consolidation and slow-down in public spending as well as a subdued global growth outlook. The 2016 Budget Review forecasted real GDP growth of 0.9% for 2016 and updated forecasts indicated that growth for the current year will be between 0.1% and 0.4%. The revised growth forecast from institutions such as the South African Reserve Bank, Bureau of Economic Research, IMF, World Bank and Reuters showed a downward trend for 2017 as well as 2018.

He noted that persisting budget deficits in a context of slow growth has raised concerns about the sustainability of the country’s fiscal framework. In response to these concerns, government changed its fiscal policy stance in 2014 including principles of fiscal consolidation. The objective was to return the country to a sustainable fiscal trajectory by stabilising debt as a share of GDP. This included both revenue and expenditure measures such as:

(1) New revenue raising measures

(2) Introduction of an expenditure ceiling, and

(3) Introduction of efficiency measures

This challenge was compounded by the need to maintain and increase social spending in-line with a growing population confronted with fewer employment opportunities.

Ms Nelia Orlandi, Deputy Director, PBO, highlighted the revenue trends. Lower than anticipated economic growth resulted in less tax revenue for government since there was a close relationship between revenue collection and economic growth. In response, government started introducing measures to raise additional revenue. In total, the changes were expected to raise an additional R18.1 billion in 2016/17. Tax revenue data for the first five months of the 2016/17 financial year showed that the tax adjustments have led to a 6.2% increase in total tax revenues, when compared with the same period in the previous financial year. This was however 3.7% lower than the estimated 9.8% growth in the 2016 Budget Review.

She said that assuming the year-to-date growth of 6.2% persisted for the remainder of the financial year; the PBO estimated a total gross tax revenue collection of approximately R1.136 trillion for 2016/17. This was R39 billion less than the R1.175 trillion estimated for 2016/17. The 2016 MTEF revenue raising proposals for both 2017/18 and 2018/19 intended to raise a further R15 billion.

Ms Orlandi continued explaining growth rates in the five largest revenue sources. PBO estimated nominal growth to be at 9.8% but currently, for the first five months of the new financial year, it was at 6.2%. She continued with revenue trends by highlighting a graph indicating the different sectors and what the changes of the revenue collection and tax policies were compared to the first five months of 2015/16 and 2016/17 in Corporate Income Tax (CIT) and Value Added Tax (VAT). In terms of the financial markets, the CIT was growing slower compared to the previous financial year. In manufacturing, CIT as well as VAT was also growing slower.

In terms of expenditure of a selection of National Departments for the year to date, the Department of Home Affairs had already spent 53.7% of its total budget for 2016/17. Higher Education and training had spent 61.8% of its budget for 2016/17. In contrast to these departments, the Department of Water and Sanitation had spent 34.1% of its 2016/17 budget which indicated slow spending because the nominal benchmark for this time of the year was 42% and Sport and Recreation had only spent 27.0% of its budget.  She said in terms of economic classification, looking at Higher Education, the biggest spend was in terms of transfers hence it had transferred 66.4% of its appropriation already. The Department of Energy had low spending on current payments which included Compensation of Employees (COE) and Goods and Services, with only 33% spent thus far for the 2016/17 financial year. The Department of Telecommunications and Postal Services were only on 20% for current payments and Sport and Recreation were only at 21.7% of its transfers and subsidies. In terms of provincial revenue and expenditure trends, the data available was only for the first quarter. The benchmark was 25% but in terms of provincial revenue it had collected 22.6% and expenditure was at 22.1%.

When comparing the different provinces with each other specifically on social services, when looking at the Education sector, Eastern Cape was the lowest of the nine provinces and Free State was the highest on Education but the lowest on Health. When looking at the Social Development sector, Mpumalanga was the lowest province and the Western Cape was the highest on Social Development expenditure. Total expenditure was around 25%. In comparing provinces with the provincial expenditure within economic classification, seven provinces were almost at or at 25% except the North West and Western Cape. In terms of transfers, the Free State had transferred the most funds. Payment for capital assets was low mostly below 20% except for the North West province.

Ms Orlandi gave preliminary results on the financial position of Metros which indicated with regards to asset management, it was expected that municipalities would spend between 10 and 20% of total expenditure on capital but below this expected range would impact service delivery. All the metros spent more than 10% of total expenditure on capital during the 2015/16 financial year. On debtor management, an assessment of outstanding debt provided an indication of the performance against the quality of credit control and the quality of revenue management. Approximately 75% of total debt was outstanding for more than 90 days at 30 June 2016. In respect of liquidity management, current ratios showed the ability of municipalities to pay back its short-term liabilities with its short-term assets. The expected range for the current assets to current liabilities ratio was between 1.5 and 2.1. The higher the current ratio, the more capable the Municipality was to pay its current or short-term obligations. Johannesburg and Tshwane had ratios below 1 which suggested that these municipalities would be unable to pay all its current or short-term obligations if they were due at any specific point.

She said with regards to expenditure management, preliminary outcomes showed that most Metros spent within the normal range of between 25% and 40%. If the ratio exceeded the norm it could have provided an indication of inefficiencies, overstaffing or the incorrect focus due to misdirected expenditure to non-essential or non-service delivery expenditure. Ekurhuleni, eThekwini and the City of Tshwane overspent on employee related costs. A comparison of employee costs with personnel numbers indicated:

(1) City of Tshwane overspent by 4.5% while reflecting 9 492 vacancies

(2) City of Johannesburg spent 96.5% of the adjusted budget, which provided little resources to fill the 6 769 vacant positions.

Looking at efficiency, municipalities should at least recover operational costs for the services being delivered. The net operating surplus margin assessed the extent to which the municipality generated operating surpluses. The norm was equal to or greater than zero %. All metros showed positive surplus margins except for Mangaung. On grant dependency and capital spending, the preliminary number for 2015/16 showed that:

(1) The Cities of Cape Town, Johannesburg and Mangaung funded more than 50% its capital expenditure.

(2) Metros spent R34.95 billion on capital. This was 85.9% of the 2015/16 adjusted budget.

(3) Johannesburg and Tshwane spent 91% and 92.1% respectively.

(4) Slow spending in Buffalo City or 72.6% was recorded

(5) Metros spent 80.5% of conditional grants excluding the Urban Settlements and Integrated City Development Grants

She then spoke around some of the 14 Outcomes of the Medium Term Strategic Framework (MTSF). There were some issues being discussed and debated around a few of the 14 Outcomes namely:

(a) A long and healthy life for all – NHI was included in this and putting a lot of pressure on the economy

(b) Skilled and capable workforce to support an inclusive growth path – Higher Education pressures

(c) An efficient, competitive and responsive economic infrastructure network – included Broadband, Energy and Transport

(d) Responsive, accountable, effective and efficient local government system – all the services needed to be provided were also under pressure

In terms of the monitoring of the implementation of the MTSF, PBO had done quite a lot of work on the National Development Plan (NDP) and how to monitor the MTSF. When the analysis of the 2014/15 outcomes was done, it showed very slow progress. She highlighted that PBO wanted to provide outcomes for 2015/16 but the data was not available, seven months after the end of the 2015/16 financial year. Other constraints were the alignment of the budget function groups with the 14 outcomes and the alignment of management structures of the MTSF and the budget. Another constraint was the conditional grant allocations and outputs were not in line with the MTSF and the quality of the reporting on the MTSF and integration of the MTSF in standard budget and planning processes could not show real integration.

Prof Jahed gave a summary on the presentation. The economic crisis in 2008 affected the economic climate in South Africa. Counter-cyclical principles applied in fiscal policy resulting in increased personnel and increased government expenditure. South Africa had experienced low economic growth due to low revenue collection, unemployment and slow spending on capital. There was a trend of higher debt costs and less funds available for distribution. Consolidation principles applied to fiscal policy included the expenditure ceiling, efficiency measures and to review transfers to institutions with surplus finds. Funding priorities focused on reprioritisation, guiding principles and the National Development Framework (NDF).

Discussion

Chairperson Phosa thanked PBO for its elaborate and insightful presentation. She handed over to Chairperson De Beer.

Chairperson De Beer referred to slide 24 of the presentation and said those points highlighted the areas of oversight for the Committees on the MTBPS and the National budget as well. Looking at the provinces and also the City’s economies was very important. The provincial growth and development strategies, how was it progressing? There was a lot of work to be done.

Mr D Maynier (DA) wanted to know more about PBO’s estimated revenue shortfall on slide 12 of the presentation which indicated R39 billion. Was that figure credible given two factors? Firstly, it seemed as if the PBO calculation was linear and it didn’t factor in that there may be a higher rate of collections in the second half of this financial year. Secondly, PBO had used five months of data when six months of data was in fact available therefore he felt that the R39 billion figure was not credible and PBO had to defend it. What was really needed in this meeting was some idea of what the total adjustment was likely to be given the fact that growth had declined. The Committee needed a forecast of the effect of that phenomenon on the new expenditure, the deficit and debt. But the fact was, after three years and “throwing millions of rands at the PBO”, that was exactly what the Committee did not have and the question was why. Frankly the PBO had to raise its game. The presentation was literally “a first year economics class with rookie errors”.

Prof Jahed replied it was a critical point raised but the question was how to “pitch” or “teach” the information being presented and perhaps there was a need for discussion with the four Chairpersons of these Committees to decide on how information should be presented.

Mr Brandon Ellse, Financial Analyst, PBO, responded to the questions around the credibility of the revenue estimate. He said that the PBO was fortunate enough to have a good working relationship with the Office for Budget Responsibility in the UK, the Congressional Budget Office in the USA and the PBO in Canada and that the methodology had been adopted after personal correspondence with these institutions. The methodology is, therefore, standard practice. The methodology itself was not as simple as a linear projection but instead used the five months of tax revenue data available at the time of writing to arrive at an estimate while maintaining the monthly profiles of tax revenue collection in the previous financial year.

Mr Mohamed said he wanted to reply to the comment that the presentation was lacking. Hopefully in the future there would be more room for PBO to explain the implications and long-term trajectories of policy changes. It was very important because it raised issues of how to think about economics and what was first year economics and what wasn’t. The fact is that a lot of people who had that perspective, have actually been totally wrong about the global economy and looked at the wrong issues. Therefore it was important to investigate what the role of a PBO was. He wanted members and Chairpersons to tell PBO exactly what it was that they expected so it was able to give it to them in a broader explanation. He was not saying this as a criticism but as a way to positively move forward so that no accusations were given. 

Mr A Lees (DA) said that given the high debt levels persisted, was it PBO’s opinion that the expenditure ceiling was still sufficient or should they be looking at cutting costs and reducing expenditure in line with the forecasts on revenue.

Mr SN Buthelezi (ANC) referred to Prof Jahed that spoke around macroeconomic experimentation and unconventional macroeconomic policies and quantitative easing. What had been the impact of these unconventional macroeconomic policies on those countries referred to in the presentation? Has South Africa adopted any of these unconventional policies or were we stuck doing things the old way? Looking at the GDP ratios, they were very useful. However, when presenting that information it would be useful to include other countries. Also an important projection that the Committee should see was the one on inflation as it impacted on interest rates and other variables in the bigger economy. Another important thing was to not lose sight on the impact on poverty levels and inequality. He felt South Africa had failed with regards to investment as last amount of R600 billion was not invested. He suggested that government also try and go into private sector investment as we cannot solve South African economic problems alone.

Mr Rashaad Amra, Economist, PBO responded it had noted that South Africa had been experiencing negative growth per capita basis over the past four years and this certainly had an impact on overall standards of living and average income in the country. The definition of broad employment was at a 10 year high and also narrow employment was close to 50% so certainly there was an impact of growth on poverty.

Chairperson De Beer noted that it could be one of the questions to the Minister the following week about private sector investment regarding this R600 billion as it was mentioned in newspapers.

Ms E Louw (EFF) said her question related to slide 19 of the presentation. She noted the last time PBO presented it spoke about its mandate which indicated that it could not make recommendations. Was there any research done to indicate the contributing factors towards low expenditure, especially in the Eastern Cape? Could it perhaps be due to a lack of skills, fraud or corruption? Then on slide 22 of the presentation, the slow spending in Buffalo City, were there any factors.

Ms Orlandi said that PBO did not look at the contributing factors but rather at the overall picture on a higher level.

Chairperson De Beer said that the National Treasury produced reports on all municipalities and it was available on its website. All the information the member was requesting was additional information.

Mr O Terblanche (Western Cape, DA) referred to what Prof Jahed spoke about regarding the low investment. Was it known to what extent it might be self-inflicted due to issues such as Nene-gate and the Pravin Gordhan Zuma saga at the moment? To what extent had this impacted on investor confidence?

Mr Amra replied yes investor confidence affected short-term investment as well as fixed capital investment and was a function of domestic and international developments. With the Cabinet reshuffle towards the end of last year, it resulted in significant depreciation of the Rand and an increase in South African bond yields which suggested that local factors do have a real impact. From the PBO quarterly reports of March, June and September, it had noted this.

Mr M Figg (DA) felt that there were a number of problems to be solved in the country and there was a tendency to keep on blaming the past for the current situation the economy was in. He said economic growth was predicted now to be between 0.1% and 0.4% yet a few weeks ago the prospects of economic growth was at 3.3% and everyone was excited. Why was it that the country could not continue with that trajectory? Another concern was debt that was spiralling out of control. A few years ago it was at 42% debt to GDP, then it went to 46% and last year it was at 50%. Was there any way to set a target or benchmark even though it was out of control?

Mr Amra said the 3.3% referred to was a quarter-on-quarter growth rate and came off a low base in the first half of the year. If looking at the year-on-year comparison, the growth was at a modest 0.6%. With regards to the benchmark for debt, National Treasury had not subscribed a benchmark to South Africa. 

Mr Mohamed added that he started off the presentation looking at path dependency and it was really important to South African weaknesses and weaknesses in the global economy. With many things happening it was evident that the political climate did affect the overall economy of the country. In the long-term it might be useful to consider the fixed term investment trends. He felt that it was not necessary to talk say “debt is spiralling out of control” because there was no empirical research indicating that South Africa’s debt would be soon spiralling out of control.

Mr A Shaik Emam (NFP) noted that the Committee was aware that debt was increasing, the deficit was increasing, the interest rate was increasing, and the unemployment rate was increasing. The poultry industry was thinking of laying off thousands of people. The manufacturing and textile industries were grounded due to imports yet nothing was being done to change it. A lot of money was also being lost due to maladministration and fraud and these scenarios were not changing just getting progressively worse all the time. Water and Sanitation had over R1.3 billion in irregular expenditure and Energy about R400 million irregular expenditure. What should be done for people to face consequences as the state was seen as the “cash cow”? If things continued as they were, the poor would continue to get poorer and the rich would continue to get richer.

Mr BR Topham (DA) asked about the high debt costs. South Africa was facing a possible downgrade and that would affect the debt cost. Was there an assessment to indicate the effect on the economy if there was a downgrade or upgrade for that matter?

Mr Amra replied that what South Africa had done and been very prudent in this regard was that the foreign currency denomination of South Africa’s debt was a very small portion compared to other emerging economies that have been downgraded like Brazil, Turkey a month ago, and Russia. Compared to these countries South Africa had very favourable composition. He said National Treasury had a low foreign currency denomination and put in new benchmarks regarding short-term money which was good from a liquidity and cost perspective, and it increased the uncertainty of the debt financing cost. When it came to National Governments debt, it was in a healthy position. However when it came to the inclusion of contingent liabilities and provisions, the situation was far more constrained.

Mr F Esack (Mpumalanga, DA) noted that lots had been said and raised. Referring to slide 25 of the presentation around counter-cyclical policies, he felt that there have been many warnings but it “fell on deaf ears”. With regards to the expenditure ceiling mentioned on slides 10 and 25 of the presentation, perhaps the Committee should look for guidance as PBO was not the authority to make decisions. On the funding priorities PBO made a comment the country was above resource allocation so he wanted to know where to from here?

Ms Orlandi agreed that things did fall on deaf ears. The Departments did not implement guidelines

Chairperson Carrim felt that some of the questions to PBO were not fair as it could not give the Committee recommendations. It could only give the Committee options from observations made. It would be nicer for him if PBO explained things a bit simpler because the input was too technical. PBO should explain concepts more to give members a feel of what they were trying to do. Given the constraints PBO needed to be a bit more helpful in putting options to the Committee and taking the debate forward to see a significant link between this year and last year’s input. Mr Maynier had his own agenda for his comments but he personally felt that PBO did very good work given the fact that it was understaffed and under-resourced.

However, the slide presentation was not great. On the issue of macroeconomic experimentation there was not time to elaborate but at some stage PBO had to explain to the Committee what it meant. On slide 6 of the presentation PBO stated “prospects for household consumption and private investment was is low, therefore, government consumption and public investment is required for GDP growth”. That was a useful observation but then the rest of the input shows how restricted the fiscal and monetary space was. An important question he wanted PBO to answer was on slide 24 of the presentation. PBO said the alignment of the budget function groups with the 14 outcomes are not in synergy. What does it mean by that? Also, the alignment of the management structures of the MTSF and the budget. What does it mean by that? These are issues the Finance Committee would apply when writing their report.

Ms Orlandi said PBO had done two reports. The first was the progress and the alignment of the MTSF with the NDP and the findings were that most of them were aligned but there were some technical issues and constraints for the implementation of the MTSF. The second report was about the alignment of the budget with the NDP and the MTSF outcomes and PBO tried to determine whether it was possible for the Committees to do oversight in terms of performance and expenditure and the findings were that at this stage it was not possible and PBO investigated the root cause as to why it was not possible. If needed, these reports could be shared with the Committee again, as it had already been sent out.

Mr Mohamed replied that PBO would link more information to the overall development framework so that everyone could understand how to look at the scenarios and options as well.

Chairperson De Beer recommended members to read the International Monetary Fund (IMF) report of October 2016. Every year members were busy with the BRRR process and took recommendations and observations. It was important to go back to those resolutions that the Committee took in the National Assembly and the National Council of Provinces (NCOP) as a tracking mechanism to see what happened to those recommendations taken. Also, the quarterly reports being produced by PBO was a very important document and therefore he felt that the Committees had to engage formally on a quarterly basis with PBO and National Treasury present to pick up trends.

Chairperson Mohai said the objective of the meeting was quite clear to set the scene for the upcoming presentations with the Minister about the MTBPS. PBO’s presentation was very helpful in many respects to present facts and research to members to strengthen capacity to play a robust and meaningful role in oversight particularly the reprioritisation of the budget. There was a need for robust discussion regarding the current economic outlook. The current global outlook and the devastating impact of the 2008 world economic crisis still harmed various small economies of developing countries.

The meeting was adjourned.