Pre-MTBPS briefing by Parliamentary Budget Office

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Finance Standing Committee

24 October 2017
Chairperson: Mr C De Beer (ANC), Ms Y Phosa (ANC), Mr Y Carrim (ANC)
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Meeting Summary

The Standing Committees on Finance and Appropriations together with the Select Committees on Finance and Appropriations were briefed by the Parliamentary Budget Office (PBO) on the pre-Medium Term Budget Policy Statement (MTBPS). The briefing was meant to assist Members in identifying focus areas in relation to the MTBPS presentation by the Minister of Finance the following day.

The PBO stated that the expected priorities in the 2017 MTBPS would derive from spending priorities for 2018 anticipated in 2017 Budget, the Executive Mandate Paper and emerging spending pressures.

Macroeconomic analysis of factors shaping the South African growth path indicated that: household consumption will remain modest because households that had access to credit have to pay down the stock of credit amassed at great speed before the recession. Furthermore, any policy directions implying some form of fiscal consolidation would be associated with lower economic growth and a reverse multiplier effect on the economy. Lower economic growth is associated with lower government revenues and there was an expectation that government will miss its 2017/18 revenue targets.

The PBO had conducted an analysis on the implementation of the National Development Plan (NDP) and the alignment of the Budget with the Medium Term Strategic Framework (MTSF). Analysis and assessments undertaken included: progress on the performance of NDP; the alignment of the 2014-2019 MTSF with the actions and objectives of the NDP; the alignment of the budget with the MTSF; the integration of the MTSF into departmental annual performance plans; and an evaluation of the suitability of budget programme structures to implement the MTSF. Also, aligning NDP with budget allocations was key. There has not been significant growth in the productive sectors. Business services, transport & storage services, finance & insurance services and wholesale & retail trade services accounted for approximately 75% of the change in capital stock for all economic subsectors from 2002 to 2008; excluding the change in capital stock of general government services. The structure of the economy has been changing overtime and the accumulated debt burden owing to the 2008 financial crisis was still being felt across most macroeconomic sectors. Overall, there had been a decline in manufacturing jobs but a gradual increase in business services jobs. There were prospects for growth that would benefit highly skilled and skilled workers in general government services.

The economy was still recovering from the recession experienced in the last quarter. The growth prospects in the medium term were poorer than predicted at the beginning of the year. The rate of unemployment was at a 13 year high, with 6.1 million South Africans unemployed (narrowly defined unemployment). Unemployment numbers could be largely attributed to the low economic growth margins. Also, current calendar year growth was expected to hover around 0.6% and 1.7% in the next three years based on World Bank data. This suggested government might have to revise its growth forecasts downwards in the MTBPS.

The PBO identified possible risk areas in terms of expenditure and performance trends within the national sphere of government. Notably, fiscal risks contribute to government’s failure to attain a set of fiscal objectives and cause variances in anticipated: revenue collection; government spending and debt levels. Hence, monitoring fiscal risks and their potential impact on fiscal planning was paramount. Currently, the main sources of fiscal risks in South Africa were: low economic growth and recession as well as revenue collection shortfalls. Infrastructure underspending and contingent liabilities emanating from State-Owned Enterprises (SOEs) were also a significant challenge. The list was not meant to be exhaustive and other risks would encompass: political and policy uncertainty; wage bill pressures; sovereign rating downgrades; unplanned spending requests and sustainability of social spending including grants. To mitigate these risks, government had various policy options to stimulate the economy and averting a recession. Options available include: expanding the tax base; spending reprioritisation; reassessment of borrowing levels; and policies to boost consumer and investor confidence.

It warned that the contingent liabilities represented by SOEs constitute one of the most glaring threats to SA’s fiscal stability. Contingent liabilities, particularly guarantees, pose a risk on the fiscal framework and sustainability of public finances. Currently, the total contingent liability stood at R829 billion, with about R466 billion (56%) being in the form of guarantees to SOEs. South African Airways only constitutes 2.2% of guarantees. However, it was not merely about the size of the guarantee that matters but also the health of SOEs granted the guarantees. SOEs warrant some high level of oversight on an ongoing basis as default by one could trigger cross default clauses that would be catastrophic.

The Democratic Alliance expressed frustration with the PBO, arguing that the presentation was not in line with expectations and did not add much value to the MTBPS discourse. However, the majority of Members felt the PBO was doing a commendable job under the prevailing circumstances and were appreciative of its presentation. They asked if the PBO believed revenue targets in the current fiscal cycle would be met. What were the implications of government’s contingent liabilities on the economy? To what extent was the Jobs Fund and the black industrialists program realising intended developmental objectives? They also asked PBO to look into the impact of the Department of Monitoring and Evaluation in making sure that departments deliver effectively. Underperformance had to be addressed as it implied denying people essential services. Membersw noted that this was a pre-briefing and that a comprehensive analysis of the MTBPS would follow the Minister’s presentation when the PBO would be expected to speak to the facts in the MTBPS

Meeting report

Ms Y Phosa welcomed a delegation from the Ugandan Parliamentary Budget Office. Interactions between the South African and Ugandan Offices would enable the exchange of ideas. She indicated that the briefing would assist the Money Bills Committees to robustly engage Treasury on the Medium Term Budget Policy Statement (MTBPS) and to assess risks that might affect the economy’s growth path.

Briefing by Parliamentary Budget Office (PBO)

Prof Mohammed Jahed, Director, PBO, stated that the briefing was meant to enable Members to identify focus areas in relation to the MTBPS the following day. He emphasised the importance of prudent budgeting and resource allocation in the context of stimulating macroeconomic growth and development. It was important that the budget does not become an annual event; it is a long-term process and had to be seen in that context.

Ms Fatsani Banda, Economic Analyst, PBO, outlined government’s policy priorities. The PBO had conducted an analysis on the implementation of the National Development Plan (NDP) and the alignment of the Budget with the Medium Term Strategic Framework (MTSF). Analysis and assessments undertaken included: progress on the performance of NDP; the alignment of the 2014-2019 MTSF with the actions and objectives of the NDP; the alignment of the budget with the MTSF; the integration of the MTSF into departmental annual performance plans; and an evaluation of the suitability of budget programme structures to implement the MTSF. Also, aligning the NDP with budget allocations was key.

Government had been tasked to come up with a Mandate Paper which was approved by Cabinet in August 2016. Analysed from a broad perspective, the role of the Executive Mandate Paper was to: strengthen the alignment of the Budget, the MTSF and the NDP; prioritise the achievement of the outcomes of the NDP; ensure a focused implementation of government’s plans; and guide and focus the 2018 budget prioritisation in the last 24 months of the current administration. The expectation was that the Mandate Paper should: guide all spheres of government; guide all government entities to refine plans and develop budget proposals; and consider the specific functions and strengths of these institutions as well as the various pressures they face. Consequently, the 2017 MTBPS was anticipated to identify spending priorities based on: the 2017 Budget anticipated priorities for 2018; the Mandate Paper as well as emerging or unforeseen spending pressures. Mandate Paper priorities in relation to the anticipated budget priorities for 2018 include: job creation and small business development; youth development; infrastructure expansion and maintenance; land reform, smallholder farmer and agriculture development; comprehensive social security, education and skills as well as an integrated plan to fight crime. Advancing the national interest in SADC, African Continent, BRICS and the Indian Ocean Rim Association was also an imperative.

Mr Seeraj Mohamed, Deputy Director: Economics, PBO, pointed out that there has not been significant growth in the productive sectors. Business services, transport & storage services, finance & insurance services and wholesale & retail trade services accounted for approximately 75% of the change in capital stock for all economic subsectors from 2002 to 2008; excluding the change in capital stock of general government services. The structure of the economy has been changing overtime and the accumulated debt burden owing to the 2008 financial crisis was still being felt across most macroeconomic sectors. Overall, there had been a decline in manufacturing jobs but a gradual increase in business services jobs. There were prospects for growth that would benefit highly skilled and skilled workers in general government services.

Mr Rashaad Amra, Analyst, PBO, said the economy was still recovering from the recession experienced in the last quarter. The growth prospects in the medium term were poorer than predicted at the beginning of the year. The economic outlook had been revised downwards. The rate of unemployment was at a 13 year high, with 6.1 million South Africans unemployed (narrowly defined unemployment). Unemployment numbers could be largely attributed to the low economic growth margins. Also, current calendar year growth was expected to hover around 0.6% and 1.7% in the next three year based on World Bank data. This suggested government might have to revise its growth forecasts downwards in the MTBPS.

Dr Dumisani Jantjies, Deputy Director: Finance, PBO, noted that the MTBPS does not propose revision to taxes, but presents early indications for tax proposals to be implemented during the following year’s budget. Different economic subsectors contribute differently to tax revenue. Estimates suggest that manufacturing was the highest contributor with a low Effective Tax Rate (ETR). He identified possible risk areas in terms of expenditure and performance trends within the national sphere of government. Notably, fiscal risks contribute to government’s failure to attain a set of fiscal objectives and cause variances in anticipated: revenue collection; government spending and debt levels. Hence, monitoring fiscal risks and their potential impact on fiscal planning was paramount. Currently, the main sources of fiscal risks in South Africa were: low economic growth and recession as well as revenue collection shortfalls. Infrastructure underspending and contingent liabilities emanating from (SOE’s, PPP’s) were also a significant challenge. The list was not meant to be exhaustive and other risks would encompass: political and policy uncertainty; wage bill pressures; sovereign rating downgrades; unplanned spending requests and sustainability of social spending including grants. To mitigate these risks, government had various policy options to stimulate the economy and averting a recession. Options available include: expanding the tax base; spending reprioritisation; reassessment of borrowing levels; and policies to boost consumer and investor confidence.

Prof Jahed, in conclusion, stated that the expected priorities in the 2017 MTBPS would derive from spending priorities for 2018 anticipated in 2017 Budget, the Executive Mandate Paper and emerging spending pressures.

Macroeconomic analysis of factors shaping the South African growth path indicate that: household consumption will remain modest because households that had access to credit have to pay down the stock of credit amassed at great speed before the recession. Furthermore, any policy directions implying some form of fiscal consolidation would be associated with lower economic growth and a reverse multiplier effect on the economy. Lower economic growth is associated with lower government revenues and there was an expectation that government will miss its 2017/18 revenue target.

Discussion

Mr De Beer commented about the Mandate Paper mentioned during the presentation. The Minister would have to address its timelines during engagements with Parliament. Also, cooperation between government and the private sector to get the economy growing and consistent to the various policy plans was crucial. Currently, the private sector was sitting with approximately R1.3 trillion that could be reinvested into the economy. Lessons from Malaysia and Singapore on achieving economic growth and development were indicative. Also, underspending in provinces was a cause for concern that called for critical assessments. The challenge was not the shortage of funds but poor expenditure prioritisation.

Mr Carrim applauded the PBO and Director Jahed in particular for the good work it was undertaking. Also, staff demographic and gender representation within PBO was commendable.

Mr D Maynier (DA) expressed frustration with the PBO. The presentation was not in line with expectations and did not add much value to the MTBPS discourse. He expected an independent assessment of the implementation of the 14 point plan on inclusive growth; the state of SOEs; and most importantly, forecasts of gross expenditure, revenue and deficit. He suggested that the Office try to frame its presentations to suit its clients, the Members going forward.

Mr A McLaughlin (DA) failed to see the relevance of the presentation to the MTBPS discussions. It did not help to outline the state of affairs without offering solutions. The presentation made mention of the executive Mandate Paper, a document that was classified and inaccessible to Members. Why was the PBO using the document knowing that its access was denied to Members? He failed to understand how the PBO would suggest expansion of the tax base as part of mitigating measures against low economic growth and recessions.

Ms Phosa pointed out that the meeting was a pre-briefing. A comprehensive analysis of the MTBPS would follow the Minister’s presentation when the PBO would be expected to speak to the facts in the MTBPS.

Mr N Kwankwa (UDM) came to PBO’s defence in light of the Democratic Alliance’s comments. The PBO should not be turned into a political office and had to remain impartial. On government’s contribution to fixed capital formation, to what extent would it affect growth prospects? This would tie in with economic growth forecasts. He asked the PBO to make an assessment on the feasibility of an accommodative monetary policy to stimulate growth amidst fiscal consolidation. 

Ms T Tobias (ANC) appreciated the presentation as it was assisting to assess the economic outlook in its entirety. She noted the relationship between government spending and household consumption. Did the PBO believe that revenue targets in the current fiscal cycle would be met? She asked the PBO to look into capital stock and its availability after the MTBPS. She asked for an analysis of the contribution of SOEs on government’s contingent liability in percentage terms.

Ms P Kekana (ANC) agreed with Ms Tobias. The presentation was helpful as it touched on topical issues. However, there was need for a comprehensive analysis on whether departments are focusing on implementation of the NDP. She asked the PBO to look into the impact of the Department of Performance, Monitoring and Evaluation (DPME) in making sure that departments deliver effectively. Underperformance had to be addressed as it implied denying people essential services. Also, to what extent was the Jobs Fund and the black industrialists program realising intended developmental objectives?

Prof Jahed acknowledged the need to consult Members before presentations. He would consult with the PBO Advisory Board on the broad spectrum of issues raised.

Mr Carrim said Members had to be fair. It was decided last year that they would furnish the PBO with issues they needed to find expression in its presentation beforehand. However, Members had not done so and there was no need for PBO to be apologetic. Mr Maynier’s comments were extremely arrogant as the PBO was doing a reasonably good job under the prevailing circumstances.

Mr Mohamed replied that economic growth had to be analysed in a more nuanced way. In the current period of dampened private sector investment and capital stock growth, it could be necessary for government to increase expenditure as a means of stimulating growth. He indicated that the PBO does not make its own revenue and expenditure forecasts but does audit government provided forecasts. Also, the PBO was not in any way suggesting a tax increase but was merely highlighting the full spectrum of alternatives available to government. In terms of the Mandate Paper, the PBO got hold of it when DPME distributed it during a Standing Committee on Appropriations meeting. Mr McLaughlin was absent with an apology during the said meeting. Also, the PBO had started working on an analysis of the NDP based on progress reports and identifying blockages stalling the implementation of the plan. It was an ongoing process and PBO was also currently assessing whether NDP indicators were being included in annual performance plans by departments.

Mr Amra warned that the contingent liabilities represented by SOEs constitute one of the most glaring threats to SA’s fiscal stability. Contingent liabilities, particularly guarantees, pose a risk on the fiscal framework and sustainability of public finances. Currently, the total contingent liability stood at R829 billion, with about R466 billion (56%) being in the form of guarantees to SOEs. South African Airways only constitutes 2.2% of guarantees. However, it was not merely about the size of the guarantee that matters but also the health of SOEs granted the guarantees. SOEs warrant some high level of oversight on an ongoing basis as default by one could trigger cross default clauses that would be catastrophic.

Ms Phosa said comprehensive discussions would be done post-MTBPS. She asked about steps to be taken in implementing the National Health Insurance White Paper. Departments were quick at releasing white papers without financial quantification. Precautionary measures had to be taken to ensure budget considerations are made and processes are duly followed. Also, the Mandate Paper states that job opportunities for the youth should come from the ICT space in particular. Consistent to this, what steps were needed to fast-track the implementation of the broadband programme?

Mr Carrim said Members should think about how some aspects of the Mandate Paper could be made available to the public because it provides the framework within which the Budget is done. The relationship between the MTBPS, NDP, 14 and nine point plans had to be established as it was confusing. Also, what criteria was being used to reassess borrowing levels? He asked the Committee Secretary to send a reminder to Members, four weeks before the budget, to submit areas which PBO would be expected to focus on. The PBO should not be intimidated by anybody.

Mr De Beer commended the PBO. He asked how far away the country was from a fiscal cliff.

Prof Jahed, in response, said the PBO had not done much analysis to be able to answer questions around government white papers. If it needed to be done, the PBO could undertake the specific studies. On the fiscal cliff, there were ideological arguments on the use of the term. The PBO would need to explore these before presenting to Members on the next engagement.

Ms S Shope-Sithole (ANC) appreciated the work of PBO. On fiscal consolidation, the hope was that there would not be any talk on austerity measures. If the private sector was not investing enough into the economy, it was left to the government to stimulate economic activity.

Ms Phosa appreciated the pre-MTBPS briefing. It prepared Members for the presentation by the Minister. Members were looking forward to the post-MTBPS as well.

The meeting was adjourned.

 

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