The HSRC presented its comments on the 2017 Medium Term Budget Policy Statement. It noted the economic downturn and sluggish recovery in the South African economy; the decline in the growth forecast from 1.3% - 0.7%; the sharp contraction in fiscal revenue which undermines the fiscal framework; the sharp unemployment rate (27.7%) with 30.4 million people living below the poverty line; the extreme wealth inequality; the rising debt share of GDP with debt-to-GDP ratio at 61% and debt-service costs/GDP share at 15%; with debt service costs the fastest growing category of expenditure, crowding out social and economic spending and further rating downgrades anticipated.
HSRC furnished its responses saying spending priorities on core social programmes that benefit poor South Africans need to be put on top of the spending agenda. The 14 Point Plan adopted in July by Cabinet focused on confidence boosting measures and micro-economic reforms. Most importantly, the reduction of electricity costs would make a substantial contribution in logistic sector reforms to reduce port and rail prices.
HSRC highlighted the importance of infrastructure investment and the R948 billion injections over three years will improve the quality of government’s infrastructure spending, with 59 projects worth R135 billion in detailed appraisal phase. However, HSRC emphasised first fixing the patterns of poor governance, fiscal and economic risks connected with state owned companies (SOCs) responsible for the economic infrastructure spending.
On Education, it said schools do not have full infrastructure and learners from poor homes go to poorly resourced schools which in turn impacts on achievement. The Post School Education and Training expenditure was absorbed mostly by universities but a holistic system in the higher education sector is imperatively needed.
On Health, HSRC emphasised the importance of the NHI as a critical transformative programme and it should not be dropped from the priority programme list. It appealed to the Committee to ensure that this programme is pushed.
On social cohesion, HSRC said that white South Africans know that wealth is highly unequally distributed in South Africa, and openly say that they are opposed to such inequalities. However, most of them are reluctant to do anything about redress with 76% white population believing that the country needs to forget the past and just move on. Meanwhile, only 51% black South Africans agree with that. Only 8% of white South Africans think a compulsory restitution tax should be implemented, whilst 43% black South Africans think that a restitution tax should be implemented.
On Higher Education, a framework for student support needs to be developed and implemented to mitigate the 55% failure rate among students, the low completion on time rates, the inequality in enrolment rates and white completion rates sitting at 50% higher than black students.
Members asked about the HSRC stance on government programmes that should not be prioritised, and an identification of those programmes; the level of debt of the South African government in relation to the dollar; proposals for concrete interventions to stabilise the economy; the cause of the low pass rate in TVET colleges; what HSRC thinks is the best way to halt wasteful expenditure in all spheres of government; research funding and the role of the private sector; research on the quality of training and education in TVET colleges and why students graduating from the sector may be unemployable; the impact of sin and sugar taxes; its perspective on key vacant posts in departments; proposals to improve infrastructure development and inter-governmental relations; about scholar transport; and about racism becoming more visible.
The Chairperson remarked that utilising state resources properly is critical and as important as accountability. HSRC will present information on the effective utilisation of state resources.
Prof Crain Soudien, HSRC CEO gave his delegation the opportunity to introduce themselves, and handed over to Mr Jacobs to speak on Accelerating Economic Growth as outlined in the presentation.
HSRC on the 2017 Medium Term Budget Policy Statement
Mr Peter Jacobs, Economist: HSRC, spoke about the steep economic downturn and sluggish recovery, the revised growth forecasts in 2017 reported a growth decline from 1.3% to 0.7%. This is due to the recession that began in the fourth quarter of 2016, and there has been a sharp contraction in fiscal revenue as a result of economic downturn. The slow growth undermines the fiscal framework, and Minister Gigaba highlighted that spending should be reduced and an implementation of selective tax increases needs to happen in order to stabilise debt-to-GDP ratio. The precarious primary sectors that government can depend on to drive economic growth are very volatile and fluctuate from quarter to quarter so the country cannot really rely on them. With unemployment at 27.7%, 30.4 million South Africans are living below the poverty line, an indication of extreme ‘wealth inequality’.
On the rising government debt to GDP, he noted that debt service costs are the fastest growing category of expenditure, crowding out social and economic spending. The debt-to-GDP ratio is at 61%, with debt-service costs/GDP share reported to be at 15% notwithstanding that further rating downgrades are anticipated.
In responding to this, taking serious cognisance of spending priorities, the implementation of the 14 Point Plan might assist in protecting spending on core social programmes that benefit poor South Africans (only 7 Spending priorities are aligned with the NDP). In addition, logistic sector reforms to reduce port and rail prices by reducing the cost of electricity and a consideration of a stimulus package (its details to be announced in February 2018) would assist in responding to the fiscal challenges.
Prof Leickness Simbayi, Deputy CEO: HSRC, briefed the Committee on the promotion of counter-cyclical R&D and innovation to stimulate inclusive economic growth – highlighting that with the retraction of the economy and increasing unemployment, R&D expenditure by the business sector is declining, in real terms. Business expenditure on R&D (BERD) in a given year tends to follow a cyclical pattern, declining in countries faced with recession, and it is influenced by a myriad of activities, including fluctuations of GDP, government funding, and industry structures. Governments usually follow a counter-cyclical pattern in a recession, by increasing funding of R&D, mostly to the public sector.
In South Africa, government expenditure on R&D has increased steadily, but to science councils and higher education, and government funding of business R&D declined from 23% in 2005/6 to 5.4% in 2014/15. Moreover, there has been a decline in expenditure on experimental development by firms, from 62% in 2005/6 to 36.9% in 2014/15. Experimental R&D typically leads to the improved production of goods and services. On a positive note, there is more R&D expenditure on applied research, an indication of potential innovation and contribution to knowledge in future. Together, these trends have implications for policy attempts to stimulate and support business innovation, so a critical policy question is: how can government promote counter-cyclical funding for private sector R&D? The typical mechanisms are tax incentives but the trends suggest the need to review existing, and identify new, funding instruments.
In terms of infrastructure, projected investment will amount to R948 billion over the next three years (5.9% of GDP). Economic infrastructure spending in state owned enterprises is key but patterns of poor governance, fiscal and economic risks connected with SOCs need to be fixed.
Prof Sharlene Swartz, HSRC Deputy Executive Director: Human and Social Development programme, looked at Basic Education and the policy success of the workbooks and textbooks as well as the concern about the implementation of infrastructure development. Grade 9 learners with textbooks scored 24 points higher for math and 31 points higher for science than those who did not have a textbook. Grade 5 learners who had workbooks scored 63 points higher than those who did not. Therefore, continued investment in structured learning materials is key to improve the quality of basic education.
She highlighted funding distribution, trends in higher education and technical and vocational education and training (TVET) college enrolments as well as broad trends in NSFAS funding on post-school education. She said the higher education sector needs a holistic system because for an economy to grow, government needs to pay more attention beyond higher education and focus on skills development. The bulk of higher education budget is absorbed by universities.
Prof Priscilla Reddy, HSRC Deputy Executive Director: Population Health, Health Systems and Innovations (PHHSI) Research Programme, discussed Health and the MTBPS highlighting the following:
• Spending on the social sector will not be adjusted over the MTEF and is expected to grow by 7% annually;
• With 2/3rds of spending on socio-economic rights
• Allocations of R948 billion for infrastructure – to include health infrastructure as more hospitals are needed particularly teaching hospitals and rehabilitation of existing infrastructure
• BUT – it is very limited on specific details on structural and specific social sector reforms.
For instance, in the 2016 MTBPS, reference was made to the establishment of NHI Fund – the 2017 MTBPS is very silent on NHI. This is a critical transformative programme –and should not dropped from the priority programme list. The NHI is an investment in health, and the previous budget allocation was quite silent on it. She urged the Committee to push the funding allocation on the NHI and ensure that government continues with it. She emphasised her strong belief that the NHI must be pushed forward.
It is important to look after both the “health” of the economy and that of the people particularly the workforce – as TB / HIV / non-communicable diseases (NCDs) pose a real threat to loss of productive skills to drive the economy. This might be the time to enhance implementation of innovative ways of funding health using innovative taxes – sugar tax, sin tax and other forms of earmarked health taxes.
She highlighted these risks:
• Significant investments in all sectors are subject to improvement in economic growth (0.7%-1.9% is very low vs NDP’s 5%);
• The competing demands for Fees-Must-Fall versus National Health Insurance;
• It is hard to see how all these competing needs will be achieved with a 0.7% in 2017 to 1.9% in 2020;
• It calls for “SMART” spending to ensure that the limited funds are allocated and used efficiently and effectively – this needs improved governance structures;
• Wasteful expenditure at all levels of government;
• The burden of disease particularly NCDs is on the rise, in addition to the already co-epidemic of HIV-TB which threatens the lives of many people with potential devastating effects on the workforce.
Prof Barwa Kanyane, HSRC Research Director: Democracy, Governance and Service Delivery programme, noted that the population of the 278 municipalities increased from 40.5 million to 51.8 million people (StatsSA 2011), with an average annual increase of 2.26 million people. This growth impacts on service delivery with more challenges for urban metros and rural municipalities. This it is imperative to reposition the local government sector for an efficient and inclusive response. A local government sector repositioning project should be initiated to ensure sector-wide and in-depth analysis of institutions and their contexts. Proposed repositioning project outcomes were:
• Dynamic strategy to enhance capacity of responsive developmental local government;
• Blueprint for best practice, implementation guidelines and roadmap to respond to the NDP Vision 2030 and the domestication of the SDGs;
• Effective delivery on Integrated Development Plans and inclusive sustainable development; and
• Report to Cabinet to guide implementation towards a responsive developmental local government in a phased roll-out.
Prof Swartz spoke about the importance of social cohesion and emphasised that when people lose trust in government they start withholding their resources from government. On racism and attitudes towards redress, she said that South Africa’s current inequalities contribute to the culture of protest and racism. White South Africans know that wealth is highly unequally distributed in South Africa, and say they are opposed to such inequalities, but most are reluctant to do anything about redress (such as land reform, affirmative action, sports quotas and apartheid compensation). In terms of specific restitution actions, statistics revealed that 76% of white South Africans believe that “we should move on and forget about the past” whilst only 51% black South Africans say the same thing. When it comes to a compulsory restitution tax, only 8% of white South Africans agree with it against 43% of black South Africans. This is an indication that the country needs to regain its vision.
When it comes to higher education, she suggested that a framework for student support needs to be established due to the 55% failure rate among students; low completion rates on time (only 1 in 4); inequity in enrolment rates (15% black versus 54% white in 2014); and white completion rates 50% higher than black students.
Ms S Shope-Sithole (ANC) asked HSRC if it is possible to help in identifying those items that government should not be spending on.
Mr N Gcwabaza (ANC) stated that HSRC does not seem to be very clear on where the country is in relation to its fiscal policy and its fiscal policy stance that could get the country out of the current economic conditions. He raised this issue because institutions like HSRC should be advising very clearly on which stance to take moving forward, and provide a clear direction on economic thought on these subjects. HSRC is only telling the Committee what has been applied and what might have succeeded in other countries. It is important to take note that it is reporting to a Committee that is mandated to advise Parliament on where resources or appropriations should be directed and why, so a clear fiscal policy proposal is critical and important, hopefully the delegation will take note of this.
He asked HSRC to indicate the level of debt currently facing the country in relation to the dollar. When you have a debt it should be possible to balance servicing the debt and paying off the principal debt, so if the focus is only on servicing the debt, it will not cut it. The threat is just too big. On slide 4 and 12, HSRC said that government funding in relation to Research and Development has declined significantly, and it was mentioned that tax incentives would be one of the things that can be explored to encourage the private sector to invest in R&D – but why should it depend on the government to incentivise the private sector to invest in things that would bring more profit. There are already a lot of incentives that have been provided to the private sector, but those incentives have been mainly centred on assisting in sustaining existing jobs and very little to create more jobs. Therefore, this leaves more room to have reservations on continuing incentivising the private sector.
Ms M Manana (ANC) referred to the analysis on the current economic situation – what are the concrete interventions HSRC proposes in order for the economy to be brought back to a good trajectory. In slide 26 under Risks, it indicated wasteful expenditure at all levels of government but HSRC did not provide possible solutions to halt this culture - so can HSRC share more detail on this. She asked when the study on Vuyani is going to be finalised, and requested that the Committee be provided with the study when it is finished. Lastly, the pass rate for TVET colleges is not satisfactory – what is the cause of this low pass rate according to HSRC research; the Committee seeks a feasible outcome.
Ms D Senokoanyane (ANC) asked about research funding, and the role of the private sector generally in the field. The country has serious problems with TVET colleges, particularly funding. Has HSRC looked at the quality of the training that the students acquire from the TVETs that somewhat makes them unemployable. Is HSRC of the opinion that sin tax on tobacco and alcohol beverages as well as the sugar tax real works, and is sin tax making any impact or rather is the contribution substantial? What is the HSRC stance on vacant posts in departments? In addition, with regards to racism and attitudes, after 1994 everyone was excited that the country was moving forward but now it appears that racism is becoming more visible and it looks as if the country may be moving backwards on this – any comments on why this is the case?
The Chairperson asked if there are concrete proposals by HSRC to improve infrastructure development and inter-governmental relations. On scholar transport, challenges in this programme include non-payments to contractors, poor management and implementation, which in turn significantly affects the operational side for these contractors. She asked for HSRC proposals or any alternative solutions to address this.
Mr Soudien responded that he was unable to answer the question from Ms Shope-Sithole.
Mr Jacobs responded that looking at the Auditor-General’s report would be a good start to look at the items that government should not spend on, and which areas can be identified as key areas to be prioritised. A more detailed discussion is needed to actually address those areas.
South Africa is not the only country finding itself in this economic trajectory, a lot of BRICS countries have been on the same trajectory along with MINT (Mexico, Indonesia, Nigeria and Turkey) countries. There is a great comparison between MINT and BRICS countries; the former is supposedly the new emerging economies. Turkey and Brazil have been in a dire economic condition over the past few years but now they might be picking up, although Turkey seems to be still stuck. There are a variety of different reasons why these countries are in that condition. It is very hard for the country to copy the methodologies that have been utilised in Western and developed countries because the economies are different, the structures are different. The United States is trying to ease up on its quantitative-easing but it cannot do so because of its financial sector and its system. The challenge in the US is to change that situation and have the banks pay back the money. There are now prospects of a new bubble that will burst in the US, so the key question is whether South Africa wants to have quantitative-easing to window-dress financial growth or economic growth. SA has a deep structural problem, which is partially being address by the Presidential Infrastructure Coordinating Commission (PICC) – injecting R1 billion into the economy through infrastructure development is an enormous way to assist in reviving the economy. China was also on the same trajectory, and its growth rate has contracted over the years but it implemented a demand-stimulation policy (lowering of interest rates) in order to boost the spending and consumption of the Chinese.
The massive infrastructure investment has a multiplier-effect, but now that crowds into other areas of investments (because that investment comes from the state), which then brings up the point why the state has been slacking on R&D. It is in the area of infrastructure where the biggest changes can emanate, because it will also present spill-over effects. There is much deeper work required to be done by the PICC, particularly paying attention to institutional tightness, the state has the role to steer and refining the rules of the game and the policies and the specific pieces of legislation. Historical public debt has played a significant role in the current debt level.
When a country services a debt, the actual debt does not decrease. What has been happening is that the country increases its borrowing in order to service the debt instead of paying off the capital debt. The mere fact that this is the case is a clear indication of how high the debt level is but the country has been fortunate because it has been utilising its bond market which has helped in slowing down the rapid increase of public debt. But now with the increasing deficit, the closing of the deficit will result in more borrowing. The key for economic growth is investing robustly on infrastructure.
Prof Reddy responded that tobacco taxation was the first type of sin tax that the SA government put in place, the rest of these such as the sugary beverage tax are a model of that work. If you look at the SA government implementation of the tobacco tax, it was very successful because data collected from 1990 to 2000 to analyze the sin tax intervention, showed a decrease in smoking amongst school children and society at large. Sin tax was put in place for responsible public health participation in which people can consciously made those decisions by themselves. The important thing is that the consumption of sugar and tobacco contribute towards the NCD (non-communicable diseases) epidemic and other infectious diseases. There have been major gains both socially and economically as a result of the implementation of sin tax. In 1999, targets were set in terms of looking at the proportions of the cigarette prices and it was then predicted that 80% of the tax would form the majority of the tobacco price component.
Prof Kanyane responded that the Vuyani study is complete and it will be furnished to the Committee in due course and HSRC would like to take the Committee through the report comprehensively, if it so wishes.
Mr Soudien responded about the failure rate in TVET colleges, and whether money is being spent wisely in the TVET sector – HSRC is looking at downstream challenges in the systems. These challenges have to do with the level of preparation of students in TVET colleges and universities. The sector needs to find ways how students can be assisted and prepared. The gap between public schools and private schools is too great, and so sometimes students coming from the public school sector are not prepared enough for the adjustment to post-school education and training. When students enter universities and TVET colleges they also have to face the challenge of dealing with the inherited flaws and challenges pre-existing in the system. In addition, teaching in TVET colleges is very poor. There is no data around all of this. People are now talking about decolonisation in the university system; perhaps this might be able to assist. There must be a renewal taking place in the TVET system before we talk about anything else, the context in which students work is very minimal, there is a need to understand how to work with what is already in the system.
Prof Swartz responded that it seems that some of the students trying to get into higher education are now being directed to TVET colleges. This would increase the pass rates in TVETs because they are stronger students who had been misplaced in the system. The Statistics South Africa General indicated that we have a system filled with 1 million students but only caters for 500 000, but what we need is 750 000 students in higher education system. There are a lot of students that are re-directed to TVET colleges but there is an issue of desirability and this upward mobility in the country.
From a racism point of view, she noted that there is a conservative tax regime compared to other parts of the world and we are very reluctant to increase our levels of taxation. This is something that can be looked at by the Committee. One example she drew attention to was Germany, after re-unification, had a solidarity tax that was time limited and everybody paid it which went to up-scaling key programmes such education, infrastructure and job creation. Now some of the research shows that people do not have an appetite for those taxes but that does not mean they cannot pay it. The way that the racism issue can be changed is not about dealing with the problem of outbursts but ensuring that people’s standards of living are improved. There is a need for some symbolic acts, such as with Black Monday and the old South African flag, the country needs to start clamping down symbolically and criminalising hate speech, and there is a need for fiscal responses – there has been reluctance in introducing a solidarity tax, restitution tax or wealth tax. This would send a strong message in terms of the immorality around the inequality problems in the country.
Prof Soudien responded about scholar transport, saying that at this point HSRC cannot answer this question, but it has been noted.
Mr Jacobs said that he has not done any substantial work on scholar transport, so unfortunately he is not in a position to provide a comprehensive response on scholar transport.
The Chairperson stated that HSRC should look into some of the issues that it could not respond to, and perhaps commence some work on those.
Ms Swartz asked the Chairperson for clarity on whether the issue with scholar transport that needs to be responded to is around the non-payment of contractors or the entire scholar transport system not working optimally in itself.
The Chairperson replied that the Committee wants to look at it from a holistic point of view, because there is a lack of a standard practice, and HSRC needs to look at what would work best for learners and some of the measures that can be introduced to revive the system to work optimally.
Mr Gcwabaza requested a detailed understanding on the purpose of establishing the community colleges and how much work has been done thus far to ensure these community colleges achieved what they are supposed to achieve. If HSRC is not able to answer this question at the moment, he will understand.
Mr Gcwabaza said that he is glad that the racism issue is starting to come out openly because that reflects how it has always been covered up since 1994 up to this point. The country prides itself in being the rainbow nation when in actual fact that is not the case. Surely the country now knows what it is dealing with, at least African people. President Thabo Mbeki warned the country about this and he was attacked by various sectors in the country. In fact, even the current President has been the victim of those attacks when he raised this, but now government can actually deal with it robustly as well as the system that perpetuates it. Clearly, the country needs a fresh and robust dialogue on this.
The Chairperson thanked the HSRC and adjourned the meeting.