2019 MTBPS: PBO & FFC briefing

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Finance Standing Committee

05 November 2019
Chairperson: Mr J Maswanganyi (ANC); Ms D Mahlangu (ANC, Mpumalanga)
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Meeting Summary

Members of the Finance and Appropriations Committees heard opposing views on what should be done to restore the country’s finances when they were briefed on the Medium Term Budget Policy Statement (MTBPS) by the Financial and Fiscal Commission (FFC) and the Parliamentary Budget Office (PBO).

In its presentation, the FFC said it supported the thrust of the MTBPS, which sought to strike a balance between resuscitating the economy and protecting social spending. With a weak economy and a diminishing tax base, there was no room for fiscal stimulus options in the near future. The only viable course of action was fiscal reprioritisation, and fiscal consolidation through restructuring.

The PBO, however, said the MTBPS offered little in terms of macroeconomic analysis and solutions to the economic downturn. The government seemed to overlook its potential role in stimulating economic growth through the budget. The solution globally was to use both monetary and fiscal policy. With increased expenditure, government could spur more private sector consumption and investment, and set off positive multipliers.

The FFC said total expenditure remained far higher than revenue collection, resulting in rising debt. Debt incurred should be used only for investing in productive activities where economic returns would be higher than the cost of debt. Consideration should be given to introducing a fiscal rule about the quantum and composition of borrowing by the National Treasury (NT).

Both the FFC and the PBO commented that economic growth and revenue collection consistently fell short of NT forecasts.

The Committees were told that in the 2019 fiscal framework, government was expected to spend R5.729 trillion over three years against revenue of R4.579 trillion. The division of revenue among the three spheres of government would increase in nominal terms, but real average annual growth would be negative at -0.5 per cent. Allocations to national government would decrease by 2.9 per cent. Allocations to the provincial and local spheres had been prioritised because of the importance of providing education, health and municipal services. Government departments had shown uneven spending patterns in the first six months of the financial year. Higher Education had spent 71 per cent of its budget and Basic Education had spent 58.5 per cent. The Departments of Environmental Affairs, Water and Sanitation, Human Settlements and Rural Development and Land Reform had spent around 40 per cent.

Both the FFC and the PBO raised concerns about the implementation of the National Health Insurance (NHI) scheme, following a statement in the MTBPS that earlier estimates for its roll-out were no longer affordable.

The FFC said it was worried about the government’s contingent liabilities, which would reach an estimated R1.015 trillion in 2021/22. Guarantees to SOEs would reach R522 billion in 2019/20. The likelihood of a significant number of these contingent liabilities materialising was a risk to South Africa’s sovereign credit rating.

The PBO said there were constraints on sectoral development goals. The SA economy was concentrated and dominated by large corporations. They had a history of using predatory behaviour to limit competition. The outsized influence of financial institutions in the allocation of finance meant that short term high returns were prioritised, and not long term productive fixed investments.

Estimated revenue under-collection for 2019/2020 was R52.5 billion. The PBO believed some policy proposals in the MTBPS could worsen tax revenue. For example, a reduction of the public sector wage bill would have an impact on personal income tax and VAT. Public sector workers accounted for a relatively large segment of the income tax base in South Africa. In times of austerity, the tendency to adopt policies of reducing the public sector workforce size or capping pay could have a disproportionate effect on the tax base.

Committee Members said they were intrigued by the idea of imposing fiscal rules on borrowing. There were questions about the feasibility of fiscal stimulation of the economy. Concerns were expressed about the impact the reprioritisation of spending would have on service delivery, and about under-spending by departments responsible for rural development, health, water and sanitation.

Meeting report

The Finance and Appropriations Committees of the National Assembly (NA) and the National Council of Provinces (NCOP) held a joint meeting to receive briefings on the Medium Term Budget Policy Statement (MTBPS) from the Financial and Fiscal Commission (FFC) and the Parliamentary Budget Office (PBO). Co-chair Mahlangu invited the FFC to make the first presentation

FFC presentation

Prof Daniel Plaatjies, Chairperson: FFC, said in his opening remarks that the overall message they were putting to the committees was the need to reorientate public finances. Social spending had to be balanced against economic growth projections. There was a need to allocate resources efficiently. Cuts in spending did not necessarily bring efficiency. Inconsistent policies created uncertainty.

In its submission, the FFC said current low and fragile economic growth was making it difficult to tackle the triple challenges of high unemployment, poverty and inequality. Economic growth was faltering due to:

  • Inefficiency in the way resources were used;
  • Fiscal leakages;
  • High levels of corruption and inefficiencies in government procurement;
  • Intermittent electricity supplies;
  • Infrastructure that was inadequately built and maintained; and
  • Policy uncertainty on issues like e-tolls and state-owned enterprises (SOEs).

The FFC said it supported the thrust of the MTBPS, which sought to strike a balance between resuscitating the economy and protecting social spending. It said trade-offs were inevitable. With a weak economy and a diminishing tax base, there was no room for fiscal stimulus options in the near future. The only viable course of action was fiscal reprioritisation, and fiscal consolidation through restructuring. It was important that government should take bold and informed steps to eliminate inefficiencies and uncertainties about policy and implementation at public institutions. These had become endemic due to fiscal leakages and dysfunctional SOEs.

The Commission noted that despite announcements about fiscal consolidation, total expenditure remained far higher than revenue collection, resulting in rising debt. On the ratio between debt and gross domestic product (GDP), it said debt incurred should be used only for investing in productive growth activities where economic returns would be higher than the cost of debt. Consideration should be given to introducing a fiscal rule about the quantum and composition of borrowing.

Year after year, actual rates of economic growth and revenue collection had failed to meet projected targets. Apart from the direct cost of adding to fiscal deficits, the FFC was concerned about the indirect costs to fiscal credibility.

On the National Treasury Economic Strategy for South Africa, the FFC had cautioned against “policy incrementalism that translates into resource wastage.” It said the strategy should have started with an analysis of development policy to see where previous interventions had failed. It had not explicitly included township economies, it had equated rurality to agriculture, and had not explicitly considered support for the informal sector.

In the 2019 Fiscal Framework, government was expected to spend R5.729 trillion over three years against revenue of R4.579 trillion. The division of revenue among the three spheres of government would increase in nominal terms, but the real average annual growth would be negative at – 0.5 per cent. Allocations to national government would decrease by 2.9 per cent. Allocations to the provincial and local spheres had been prioritised because of the importance of providing education, health and municipal services.

The FFC endorsed the freezing of executive salaries in national and provincial government. It believed this should be extended to SOEs and local governments. Wage increases should be linked to productivity.

On the consolidated government expenditure, the FFC said capital investment was not growing at a rate in keeping with government plans for infrastructure growth. It noted that spending on goods and services was declining. This could mean that cost containment measures were bearing fruit, or it might have a negative impact on social services.

Government departments had shown uneven spending patterns in the first six months of the financial year. Higher Education had spent 71 per cent of its budget, and Basic Education had spent 58.5 per cent. The Departments of Environmental Affairs, Water and Sanitation, Human Settlements and Rural Development and Land Reform had spent around 40 per cent.

The FFC welcomed the government’s introduction of a new district-based service delivery approach which aimed to improve coordination and planning among national, provincial and local governments. However, current weaknesses in government should be considered. For example, more than 60 per cent of district municipalities were dysfunctional and poorly capacitated.

The Commission said it was concerned about a statement in the MTBPS that the estimates for rolling out the National Health Insurance (NHI) scheme published in the Green and White Papers of 2011 and 2019 were no longer affordable. The Department of Health had declared R346 million in unspent funds, of which 69 per cent was related to an NHI indirect grant.

Post-school education and training remained one of the major fiscal pressures, because of a growing demand for university and college education. The Commission believed there should be a comprehensive policy on fee-free higher education.

Government’s contingent liabilities would reach an estimated R1.015 trillion in 2021/22. Guarantees to SOEs would reach R522 billion in 2019/20. Eskom accounted for more than half. The high risk of a significant number of these contingent liabilities materialising was a risk to South Africa’s sovereign credit rating.

In conclusion, the FFC said it believed the government should take decisive action to restore fiscal credibility and boost confidence in the economy.

PBO presentation

Ms Nelia Orlandi, Deputy Director: Parliamentary Budget Office (PBO), said the 2019 MTBPS was based on the State of the Nation Address(SONA), which had identified several priorities:

  • Economic transformation and job creation. This included improving trade in agricultural exports; strengthening the Industrial Parks Revitalisation Programme; and a new operational model to improve support for small and medium-sized enterprises.
  • Education, skills and health. Initiatives included improving early grade reading and mathematics; developing a student funding framework; the Student Housing Infrastructure Programme; improving the efficiency of health service delivery; rolling out a health patient registration system; and reprioritising funds to establish an NHI office.
  • Consolidating the social wage through reliable and quality basic services
  • Spatial integration, human settlements and local government. There were plans to increase free basic services and transfer funds to the Passenger Rail Agency of South Africa (PRASA) for rail modernisation.
  • Social cohesion and safe communities. The Integrated Criminal Justice Strategy would be implemented.
  • A capable, ethical and developmental state. There would be additional funds for the SA Revenue Service (SARS), the Auditor General of South Africa (AGSA) and Statistics South Africa.

Mr Seeraj Mohamed, Deputy Director, PBO, said the MTBPS offered little in terms of macroeconomic analysis and solutions to the current economic downturn. The government seemed to overlook its potential role in driving economic growth through the budget. The solution globally was to use both monetary and fiscal policy. Through the budget, government could make choices about its direct contribution to the gross domestic product (GDP). With increased expenditure, government could spur more private sector consumption and investment, and set off positive multipliers.

There were constraints on sectoral development goals. The SA economy was concentrated and dominated by large corporations. They had a history of using predatory behaviour to limit competition. The outsized influence of financial institutions in the allocation of finance meant that short term high returns were prioritised, and not long term productive fixed investments.

Mr Mohamed said the estimated revenue under-collection for 2019/2020 was R52.5 billion. Some policy proposals in the MTBPS could worsen tax revenue. For example, a reduction of the public sector wage bill would have an impact on personal income tax and VAT. Public sector workers accounted for a relatively large segment of the income tax base in South Africa, both because they comprised a larger share of the workforce, and also because their earnings tended to be higher than their counterparts in the private sector. In times of austerity, the tendency to impose policies directly aimed at reducing the public sector workforce size or capping pay could have a disproportionate effect on the South African tax base.

Possible sources of additional revenue were the taxation of electronic cigarettes; re-assessment of the VAT zero rated basket; expansion of the fuel levy’s scope; expansion of the wealth tax; and improved design and scope of tax incentives.

Discussion

Mr G Hill-Lewis (DA) said he was intrigued by the FFC’s idea of a fiscal rule. He was surprised by its policy prescription on free higher education. Most research indicated that the opportunity gap was at the early childhood phase, and this was where more money should be spent. He said the National Treasury (NT) was consistently wrong about economic growth projections, and he wondered whether the FFC and the PBO should conduct economic growth forecasts, with the NT being obliged to use these instead. He asked what the view was on classifying financial support for Eskom as debt. In his view, this was “creative accounting.”

Mr Hill-Lewis said he was very surprised by the PBO’s view that additional fiscal stimulus was required. He could not see how this could be possible with a 6.5 per cent budget deficit and the debt approaching 70 per cent of GDP. He agreed that much more spending on infrastructure was required, but this was being crowded out by consumption expenditure.

Mr D Ryder (DA, Gauteng) suggested that more time should have been allowed for the FFC presentation. They were an important constitutional body and had prepared a comprehensive briefing. To rush through it was not doing them justice.

He was intrigued that the FFC had highlighted fiscal leakages, and asked what these were. He suggested that the issue of fiscal consolidation and reprioritisation had been understated in both presentations. Reprioritisation was often done at the expense of social delivery, and instead went towards making up for state capture and dealing with the debt trap. He agreed strongly with a suggestion that the developmental state role should be refocused to concentrate on social imperatives. He cautioned against freezing public sector salaries across the board. This would lead to a leakage of skills and “punish the people that we’re tasking with getting us out of the hole that we’re in.” He expressed concern about the role of dysfunctional district municipalities in the new district-based service delivery approach, saying they would require massive funding.

The PBO presentation had also shown that the forced reprioritisation of the budget had taken money away from where it needed to be spent. An amount of R300 million had been taken from the Department of Small Business Development (DSBD) while, as the PBO had said, the economy was dominated by large corporations. He found the PBO’s calculation of a higher debt outlook than that of the NT “depressing.”

Mr G Skosana (ANC) asked what the response of the NT and Parliament had been to previous recommendations made by the FFC. He commented that the budget projections of economic growth and revenue collection were too ambitious. There should be a greater focus on those who did not pay their taxes. The issue of decreasing allocations to local government had to be considered very carefully. There were rural municipalities that did not generate their own revenue and which depended on allocations from the national government.

Mr X Qayiso (ANC) said it appeared that the budget which had been allocated for the NHI was no longer applicable. Did this mean that there would be slower implementation of the NHI? He asked how the MTPBS reflected the Presidential Job Summit plans for job creation.

Ms D Peters (ANC) said she shared Mr Qayiso’s concerns about under-spending on the NHI. While the NHI was being driven ahead in the public space, it seemed that the government did not have the capacity to make it a success. Current under-spending by some departments indicated poor planning. The supply of water and sanitation had broken down in some areas and farms were lying fallow because of a lack of funding from the Department of Rural Development and Land Reform (DRDLR). She said the PBO had raised a good argument for not adopting a blanket approach on the public sector wage bill.

Mr N Kwankwa (UDM) said research should be done into how much money could be saved by stopping fiscal leakages. While there was a valid debate about the public sector wage bill, people tended to see it as low-hanging fruit. He shared the views of Mr Hill-Lewis on the NT’s inaccurate growth forecasts. Revenue shortfalls had in the past been attributed to the hollowing out of the SA Revenue Service (SARS) through state capture. He wondered how long it would take to stabilise SARS.

Mr Kwankwa said SOEs and government departments did not take seriously the recommendations made by Parliamentary committees. There needed to be a discussion about consequences for those guilty of this. On the suggestion about rules for debt management, he asked whether there should not be a Debt Management Act which set limits for debt.

Ms D Mahlangu (ANC Mpumalanga) agreed on the need for “consequence management” when Parliamentary recommendations were not acted upon. “We don’t want to be a dog that is just barking and not biting,” she said.

FFC’s response

Prof Plaatjies said most democracies had constitutional limits to debt. There needed to be a standard measure, which was public, to help Parliament review and approve debt levels.

He said fiscal leakages occurred when weaknesses in the rules allowed fraud and corruption to occur.

On the freezing of salaries, the FFC was referring to the Minister’s announcement that the salaries of Cabinet ministers, premiers and Members of Executive Councils (MECs) would be frozen. It was not suggesting an across the board freeze for all public servants, but was suggesting that it should be applied to executive authorities across the government system, and at SOEs The President had made a policy statement on the need to reorganise the state. The way in which the government was restructured and the resultant size of the public service would have to be considered in dealing with the wage bill.

Prof Plaatjies said the MTBPS statement that estimates on the NHI roll-out were no longer affordable showed a “level of deep contestation in the system.” The FFC supported the NHI, but had questions about its implementation. Ms Orlandi had said there was a need for a broader discussion on the NHI and how it should be implemented, given a shortage of funds for rolling out the entire scheme.

On whether the FFC recommendations were taken seriously, Prof Plaatjies said agreeing with them was not enough. There had to be carry-through. He asked whether the FFC’s views were sought only for the sake of constitutional compliance.

PBO’s response

Dr Dumisani Jantjies, Deputy Director, PBO, responded to questions about whether financial assistance to Eskom should be in the form of loans or equity. He said Eskom would be expected to repay the loans and pay interest on them. The fiscus would receive better value from debt than from an equity stake when there was no money to pay dividends.

Mr Rashaad Amra, Economic Analyst: PBO, said their studies had found the NT’s economic forecasts to be as accurate as those by comparable organisations. Forecasts were informed guesses about the future.

Mr Mohamed said there was a need for fiscal stimulus to the economy. The debt to GDP ratio was increasing because the GDP was not increasing. The question was what should be done to make the GDP go up. Government spending promoted other activities within the economy. Government consumption expenditure should be seen as an investment in things like people’s health and education. Parliament could assist in identifying areas of the economy where the fiscal multiplier effect could be largest.

In ending the meeting, Mr Maswanganyi said he rejected insinuations that Parliament did not take the FFC seriously. He said the views of the FFC and others were factored into the reports produced by the finance committees.

The meeting was adjourned,

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