Pre-MTBPS: Parliamentary Budget Office briefing

Meeting report

Ms Phosa welcomed everyone to the pre-briefing of the medium-term budget policy statement (MTBPS) which was meant to prepare Members for the Minister of Finance’s speech the following day.

Parliamentary Budgeting Office (PBO) presentation
Mr Seeraj Mohamed, Deputy Director: Economics, PBO, highlighted the macroeconomic outlook as affected by the global economic situation. Optimism about the global recovery over the last year has been replaced with uncertainty and emerging markets were feeling the impact of recent sharp downturns in the exchange rate. Pessimism stemmed from: interest rate increases in Europe and the US; high levels of corporate and household debt; high levels of inequality and low levels of aggregate demand; and ongoing trade wars. The end of monetary stimuli is important for understanding current problems in emerging economies. Previous high levels of capital inflows boosted equity and bond markets and exchange rates, which led to growth in private and public debt. Notably, reversal of high levels of capital inflows creates instability and risks of default and contagion. Hence, emerging markets, including South Africa, have been negatively affected by recent sharp depreciation in the exchange rate.

The levels of debt as a percentage of GDP would reach 52.2 percent in 2020/21. However, in terms of revenue collection, the picture was looking better for South Africa than anticipated. Treasury was expected to miss its fiscal consolidation target for the year, with a budget deficit of 4% of GDP. Lower-than-expected economic growth is viewed as the key reason for the anticipated fiscal slippage. Lower growth implies slightly larger budget deficit in 2019/20 as well as higher debt-to-GDP over the medium-term. Increasing public spending by roughly R45 billion could add around 1 percentage point to GDP. Immediate and medium-term impact remained unclear, and lead-times associated with effecting spending will determine in which year impact will be felt.

Dr Dumisani Jantjies, Deputy Director: Finance, PBO, said questions about the Economic Stimulus and Recovery Package could include the following: As growth and change in the South African financial system and corporate structure could impact on success of the stimulus, will the proposed approach stimulate adequate levels of new private fixed investment and jobs in the economy? Has there been consideration that a successful stimulus may be short-lived because a recovery in aggregate demand and investment may put pressure on the balance of payments? At the level of fiscal policy: What were the reasons for continuation of fiscal consolidation? Why should budget prioritisation and stimulus occur within current fiscal framework? In a nutshell, global economic outlook indicates that prospects for recovery in growth through foreign investment and trade may be constrained in medium-term. Reversals of capital flows from developing countries pose macroeconomic stability risks through contagion and exchange rate. Overall slightly lower economic growth is expected this year followed by improvement over following two years. In spite of lower expected growth, the PBO’s recent projected revenues are within National Treasury’s projections in 2018 Budget Review. The PBO analysis of National Development Plan outcomes shows challenges to meeting targets by 2019. Overall Revenue and expenditure were within the notional benchmark, and specific provincial conditional grant spending on national priorities is slow. Continuous monitoring of fiscal risks and potential impact on the economy and fiscus was required for better fiscal planning.

Discussion
Ms T Tobias (ANC) expressed her disappointment in the presentation. Members would have wanted a more elaborate and detailed analysis from the PBO. The presentation could have spoken to fiscal consolidation; the enterprise fund; the Mandate Paper as it relates to the National Development Plan; as well as growth projections. She hoped the PBO would explore these areas in-depth during its post-MTBPS briefing to the Joint Committee.

Ms G Ngwenya (DA) asked for comments about the constant downwards revisions of growth projections by Treasury. She asked why the forecasts were always far too optimistic. She pointed out that risks had so little to do with allocations but more about imprudent spending. She felt the presentation was more of a synopsis rather than concrete advice. The PBO should provide independent advice. She would have wanted to hear more recommendations and advice rather than a summary of where the country is at.

Mr A Lees (DA) commented on fiscal consolidation. He linked it to the deficit forecasts. The PBO analysis on risks appears to dwell on fiscal consolidation as it relates to deficit projections but did not speak to other risks at all. In terms of the government stimulus package, it was unclear where the money would come from but in the event that there is reprioritisation, was it even possible to spend money that has already been budgeted for?

Mr M Paulsen (EFF) suggested ways to deal with challenges in state-owned entities which have been kept afloat through bail outs. He asked if there was any consideration to list these public enterprises on the stock exchange. This was not the same as privatisation. Public listing of the entities should be given consideration coupled with addressing management concerns.

Mr A Shaik Emam (NFP) expressed his disappointment in the presentation. The PBO had to be fully informed before advising Committees. He asked for views about Chinese investments in South Africa as there were fears that China could virtually take over the country. He commented on the economic growth projections. What must be done differently? Policymaking should be long-term focused but investment decisions should not have a negative impact on future generations. He asked for views on how SA could buoy its economy like some of its BRICS partners.

Mr O Terblanche (DA) appreciated the presentation but felt a greater measure of independence was missing in the analysis. The PBO appeared to be singing from the same hymn book with Treasury and everybody else. The impact of policy uncertainty on investment and growth was not made clear. 

Ms S Shope-Sithole (ANC) expressed concern about proposals to implement austerity measures. There was need for government to stimulate growth through meaningful investment spending in times of low economic growth. She asked the PBO to apply its independent mind on this. There was little empirical evidence to suggest that austerity works during economic slumps.

Mr M Chabangu (EFF) said the PBO presentation was not thought-provoking. He pointed out that the conditions of the National Students Financial Aid Scheme should be clearly stipulated and the monies properly accounted for. There should be value for money for government bursaries.

Mr Rashaad Amra, Economic Analyst, PBO, said the accuracy of forecasts was a serious concern as it affects the fiscal stance as well as fiscal policy framework formulation. Treasury’s world class modelling unit had suffered a skills drain. However, forecast audit reports point out that, for the past three years, Treasury’s forecasts were more accurate than those of the International Monetary Fund and the Bureau for Economic Research. At this point in time there was some confidence in Treasury estimates. The 2019-2020 revenue collection was broadly on track. South Africa was in a much better position now than it was last year when, in October, a R40 billion shortfall was anticipated. Now, only a R2 billion revenue shortfall was anticipated.

Ms Nelia Orlandi, Deputy Director: Public Policy, PBO, pointed out that the PBO’s mandate was to provide technical analysis and at this stage the mandate does not cover giving recommendations. On government’s stimulus package and its potential impact on the economy, there was scant detail on the planned allocations and whether government spending on this would be deficit neutral. It was also unclear whether it would leverage adequate private sector investment to create a meaningful number of jobs.

Mr Jantjies said there have been a number of discussions on fiscal consolidation the world over. The PBO was not making any prescriptions but was merely pointing out issues that might be raised by the Minister the following day. He asked Members to furnish the PBO with questions that would be responded to on the next briefing. He thanked the Joint Committee for the opportunity.

Mr De Beer said South Africa has experienced the longest economic downturn since 2009. This was a reality that had to be dealt with. The basics of governance and coordination should be done right. He thanked everyone for the engagements.

The meeting was adjourned.