The Parliamentary Budget Office (PBO) briefed the Committee on the 2020 Appropriation Bill.
The 2020 budget proposes a significant reduction in expenditure growth. This is to reduce the budget deficit and level of debt. More expenditure cuts could severely harm service delivery.
The Coronavirus exposes long-standing underlying problems such as inequality, failure to deliver key services, and a failing health system. It needs government to act immediately with funds provided for disasters. It also needs government to reprioritise plans and budgets tabled to provide fiscal support, preventative measures, policing, new programmes with new objectives and recovery plans for fiscal sustainability and economic growth.
Addressing the question on where the R130 billion for reprioritisation will come from, the PBO said it cannot identify where funds will come from at this stage. As soon as it receives a report on the expenditure trends in the current budget, it can analyse trends to identify where money can be shifted. The PBO is doing an analysis on the different grant allocations.
The PBO said prior to COVID-19, there was already a backlog on service delivery. The current expenditure outcomes of departments show the pattern of spending. This indicates where reprioritisation can potentially happen. The slow spending on capital assets and infrastructure does not mean there is no need for infrastructure.
Government is trying to get a loan from the International Monetary Fund (IMF), but the South African Reserve Bank (SARB) lends to other countries at a lower interest rate. A Member asked why government is not borrowing from the SARB instead of the IMF, which lives off the blood of the countries around the world.
The PBO said, in both big economies and developing countries, central banks directly finance government. In South Africa there is legislation and Southern African Development Community (SADC) agreements limiting the amount and extent to which the SARB can finance government. It is possible, but SARB decided not to go that route. It is difficult for the PBO to tell SARB what it should do, to avoid interfering with its independence.
The risk associated with approaching the IMF is the issue of conditionality and the impact on the country’s sovereignty. If a loan is taken from the IMF, the impact of pressure and moral suasion on the country’s policies in the long-run must be considered. There is also an exchange-rate risk, which creates the possibility of constraints on the balance of payments. There is a deficit on the current account and the recent increases in downgrades may exacerbate the issue as well. Risk can be mitigated by maintaining the balance of payments well.
The PBO said fiscal stimulus creates the expectation of the economy being stimulated. At this stage, government is trying to mitigate the impacts of the disaster, so it is more of a fiscal relief than fiscal stimulus.
In other comments, it emerged National Treasury identified a massive skills shortage within all government spheres. It found a lot of employees have 2-3 degrees yet it still does not translate into delivery. The question was what the cause of this is, if there is a problem with the level of education or if more training is required. Dr Mohamed said the skills shortage problem is a national one and is probably the same for the private sector.
Briefing by the Parliamentary Budget Office (PBO)
Dr Seeraj Mohamed, Deputy Director: Economics, PBO, said Parliament must pass the Appropriation Bill, with or without amendments, or reject it within four months after the start of the financial year to which the Bill relates.
The 2020 budget proposes a significant reduction in expenditure growth. This is to reduce the budget deficit and level of debt. The proposals will moderate spending as a share of Gross Domestic Product (GDP). It will also adjust the expenditure composition, but will not reduce the debt level. More expenditure cuts could severely harm service delivery.
Dr Mohamed gave an overview of public expenditure during the period of fiscal consolidation. Real government expenditure per capita has been slow, particularly in Health and Education. There was a significant reduction in real per capita expenditure on housing and community amenities. Most of the increase in expenditure from 2019/20 to 2020/21 was to assist Eskom. Social Protection per capita expenditure increased slightly.
Dr Nelia Orlandi, Deputy Director, PBO, said one method used to determine areas for reprioritisation of funds, is to analyse past and current expenditure trends. If there is underspending, like in the Department of Water and Sanitation, departments can request a roll-over of funds to the next financial year, or surrender the funds.
Where there is overspending, such as with the Department of Social Development, it can either become a first charge to the next financial year’s transfer or be covered by the underspending in other departments. She reported the three year expenditure outcomes of departments, from 2017/18 – 2019/20, which show slow budget spending. She pointed out the current expenditure and capital assets outcomes of the departments over time.
The coronavirus exposes long-standing underlying problems such as inequality, failure to deliver key services, and a failing health system. It needs government to act immediately with funds provided for disasters. It also needs government to reprioritise plans and budgets tabled to provide fiscal support, preventative measures, policing, new programmes with new objectives and recovery plans for fiscal sustainability and economic growth.
The total Disaster Relief Funds available for immediate response in the 2020/21 budget is R982 million. R138 million is available for the Provincial Disaster Relief Grant, R295 million for the Provincial Emergency Housing Grant, R354 million for Municipal Disaster Relief Grant, and R195 million for the Municipal Emergency Housing Grant. She pointed out the programmes available in the 2020/21 Budget to respond to disasters.
Dr Orlandi noted the expenditure the Minister of Finance may approve before introducing an Adjustments Appropriation Bill. Expenditure approved and appropriated for the 2019/20 financial year can be rolled over and spent in the 2020/21 financial year. The Minister announced a R500 billion fiscal support package as a preliminary provision to address COVID-19 pandemic pressures. It combines revenue, spending measures, and loan guarantees. The R15 billion for Social Development is already in the 2020/21 budget. The R50 billion support to vulnerable households causes a change to the average monthly social grant for six months. She spoke on the effect of the top-up on the budget.
In 2019/20 there was a total of R4 billion in declared unspent funds. There might also be unspent funds in the 2020/21 adjusted appropriations. In this year’s budget, there was no provisional allocation for the infrastructure fund and so it will not be appropriated. Last year’s budget contingency reserve was R13 billion, whereas this year it is only R5 billion. This can be appropriated in the adjusted budget.
(See attached presentation)
Mr A Emam (NFP) said:
- Many departments began processes before COVID-19, so its priorities were set without foreseeing the pandemic. He asked what impact this will have on department’s processes.
- After COVID-19, unemployment and crime rates are expected to increase, businesses will close, and revenue will decrease, while expenditure stays the same. Government established a Human Settlement Development Plan to address human settlements and sanitation problems. He wanted to know why this is not happening, and if there is another way government can intervene in the housing situation instead of through grants.
- He asked where the R130 billion for reprioritisation must come from.
- The President announced one of the focal areas for the country is infrastructure development, to create economic growth. He asked what the impact is of limiting the infrastructure fund on this, and considering the Department does not know when the pandemic will end, what is the PBOs advice on going forward.
Speaking about where the R130 billion for reprioritisation will come from, Dr Orlandi said it needs additional funds for social grants, health, and municipalities. At this stage, the PBO cannot identify where funds will come from. As soon as it receives a report on the expenditure trends in the current budget, it can analyse trends to identify where money can be shifted. The PBO is doing an analysis on the different grant allocations. Housing is funded by grants. Out of 19 outputs required for the housing grant, the Department only reports on two in the grant schedule, which needs to be looked at.
Dr Dumisani Jantjies, Deputy Director: Finance, PBO, said prior to COVID-19, there was already a backlog on service delivery. The presentation shows the current expenditure outcomes of departments, which is meant to show the pattern of spending to indicate where reprioritisation can potentially happen. The slow spending on capital assets and infrastructure does not mean there is no need for infrastructure.
Mr Z Mlenzana (ANC) said the following:
- the presentation was detailed and assisted the Committee to think broadly.
- He asked how the negative change in the contingency reserve will affect government’s response to pandemic spending pressures.
- He said COVID-19 has exposed the fact that government has a lot to do, especially in rural areas. What is the PBOs overall assessment of South Africa’s response to the challenges posed by COVID-19?
- Lastly, he asked what the PBO’s predictions on the growth to GDP ratio in the near future are.
Ms D Peters (ANC) asked:
- If the PBO knows about the progress with the draft Bill. In last year’s presentation, it said the Committee will engage with the Committee of Transport. This did not happen.
- The health sector was always a challenge, and this is pronounced by COVID-19. She asked if the PBO can advise on areas of reprioritisation within health.
- She also asked the PBO to highlight neglected areas, resulting from prominence given to disaster response.
- In his briefing to the Committee, the Minister of Finance said about R50 billion will go to the Department of Social Development. However, the PBO’s presentation shows a projection of about R69 billion for the Social Protection expenditure.
- The Unemployment Insurance Fund (UIF) has large reserves. She asked if the money coming from the UIF is from reserves or if it is additional funds coming from National Treasury.
- COVID-19 disaster has exposed the country’s poverty and unemployment disaster. The country needs to focus on managing the disaster through the departments of Health and Social Development.
- She asked about the impact of the budget reprioritisation on national expenditure, which is not focused on COVID-19.
- Ms Peters also asked if the 2020 budget aligned to the National Development Plan (NDP).
- She said COVID-19 will have an impact on the country’s ability to achieve its NDP targets.
Dr Orlandi said, in the view of PBO, reprioritisation will have to be within the UIF itself and not from other departments, as it has had surplus funds. The contingency reserve was appropriated every year for needs in State Owned Enterprises (SOEs). This year’s smaller contingency reserve will have to be appropriated towards COVID-19. The increase in social grants needs more than the R50 billion announced by the Minister of Finance, as the figure includes R15 billion allocated last year, which is already spent. The initial analysis of the budget found it to be aligned to the NDP targets. But this was done in the absence of the Medium Term Expenditure Framework (MTEF).
Dr Jantjies said it is still on Parliament to finalise the draft Amendment Bill.
Mr D Joseph (DA) asked the following:
- Prior to COVID-19, tourism was a big contributor to South Africa’s economic recovery plan. This is brought to a standstill. He asked what other sectors government must look at investing in, to assist with recovering the economy.
- He asked if there are any timeframes attached to the severe measures, and the medium and long term government interventions.
- On underspending in the Department of Water and Sanitation, he asked if the funds will not roll-over to the next financial year.
- From the list of programmes available in the budget to respond to disasters, nothing was mentioned for Education. He asked the PBO’s view on education.
- He referred to the R5 billion contingency reserve which was reduced from R30 billion, and asked if government is still making a contribution to the reserve fund, in case the disaster becomes worse than anticipated.
Dr Mohamed said the tourism sector is important for South Africa, but its contribution to GDP and employment is amongst the lowest of all those in the services sectors. Treasury and the Department of Trade and Industry (DTI) must make proposals for economic recovery. It must look at economic restructuring and possibilities of industrial policy, for example, industrial support. This took place after the 2009 crisis to stop businesses from failing, and eventually helps the businesses grow overtime. The PBO is looking forward to the medium and long term plans crafted by departments and Treasury, for future incentives, and hopefully stimulus packages in the future. The PBOs job is not so much offering alternative plans or recommendations on what should be done, but to assess, analyse, and critique fiscal implementation of plans.
Mr A Sarupen (DA) said the following:
- He pointed out the beginning of the presentation attributed a lot of the economic growth post the 2008 crisis, to increased government spending. This has to be balanced with increased revenue at the time. He asked if the PBO has looked at the business confidence measures and consumers willingness to invest for that period.
- He also asked if the PBO looked at which areas reprioritisation will happen in. Especially areas where the impact on service delivery is minimised, and instead the internal affairs of government are affected, such as VIP protection.
- Over the past few years, the contingency reserve was used for bail-outs. He asked if the PBO has looked at how it was used, and if it thinks its use was appropriate.
- On the country’s recovery post-COVID-19, he asked if the PBO anticipates a V-shaped recovery, or a pro-longed U-shaped recovery, or a recovery similar to the one after the Great Depression.
Dr Mohamed said his point earlier was not to say government spending was the main driver of growth during the period after the financial crisis. The main driver of growth at the time was unfortunately debt-funded consumption, and increased regulation in financial markets. South Africa was affected by the global financial crisis (GFC) in the same way as the United States, and so it experienced jobless growth and low investment during its recovery period. The recovery period was not so great and government also had to put more money into SOEs during this period. Going forward, the medium term plans must factor in how government can use its contribution towards increasing GDP, through its consumption and investments. Government can be a catalyst for spending.
Ms M Digkale (ANC) asked the PBO to mention the programmes referred to in slide 15 of the presentation, and to make additions to them. She asked if there is any chance the social grant top up will not be reversed after six months, as it will really help people. Lastly she asked what can be done to ensure fiscal expenditure moves at the required speed.
Mr X Qayiso (ANC) raised two concerns:
- In the event of other disasters, how best government can deal with these situations in terms of budgeting.
- What the role of the District Development Model (DDM) will be under the current circumstances.
Ms Peters asked what the PBO’s assessment of the impact of COVID-19 on the agricultural sector is, considering the nature of agricultural work sometimes does not allow for social distancing. She also asked if the budget projection shows a definite bias towards women, and if the Department of Social Development and Department of Women, Youth and Persons with Disabilities, show a definite indication on how it will deal with the increased Gender-Based Violence (GBV) cases during the lockdown. She asked how the departments with disaster funds performed over the years.
Dr Jantjies said COVID-19 showed there will be a need for the Department of Social Development and Department of Women to assess the impact on women, strictly. There must also be an assessment of the impact on people with disabilities.
Dr Mohammed said women bear the largest impact. Experience with other diseases shows this. An AIDS impact study found women in South Africa were withdrawing from the economy to deal with the disease within their homes and caring for family members. Unfortunately, the contribution which people working within the household add is not factored when looking at GDP and what keeps the economy going. This is especially so when it comes to women. Going forward these contributions must be gauged. The PBO will also look at conducting a gender-based study.
Mr Mlenzana asked the PBO’s advice on how to address adversities in education, faced by rural provinces, such as overcrowding in schools. The COVID-19 pandemic placed even more pressure to resolve such issues.
Dr Orlandi said there are no programmes for education in providing for a disaster. Going forward, new programmes and innovations must be established.
Mr O Mathafa (ANC) asked the following:
- If the budget allocations are aligned to the NDP. He wanted the PBOs view.
- He also asked how likely it is that the R130 billion reprioritisation will have a negative impact on local economic development in provinces and municipalities, and how such unintended effects can be avoided.
- He asked if the PBO has seen some of Treasury’s measures to stop leakages in public spending, in response to COVID-19. He wanted to know if the measures adequate.
- In the protective equipment and pharmaceutical value chain, he asked if there are areas government must consider investing in going forward. This is in light of the fact that 80-90% of the equipment and medicine used is imported.
- Lastly he asked what measures government can implement to ensure an effective economic recovery post COVID-19.
Mr Emam said government is trying to get a loan from the International Monetary Fund (IMF), but the South African Reserve Bank (SARB) lends to other countries at a lower interest rate. He asked why government is not borrowing from SARB instead of the IMF, which lives off the blood of the countries around the world. He asked for the PBO’s advice on what government can do to enhance the manufacturing industry, which has great potential to create jobs and boost the economy.
Dr Mohamed said, in both big economies and developing countries, there is a direct financing of government by central banks. In South Africa there is legislation and Southern African Development Community (SADC) agreements that limit the amount and extent to which the SARB can finance government. It is possible, but SARB decided not to go that route. It is difficult for the PBO to tell SARB what it should do, to avoid interfering with its independence.
The Chairperson thanked the PBO for its presentation, and asked the following:
- if there are any risks the country will be exposed to when approaching institutions like the IMF which work with a dollar currency.
- If there are, how can the country mitigate against those risks.
- He also asked if there are any other sources of funding to look at.
- The Chairperson wanted to know what the R200 billion credit guarantee scheme entails, and if it can be characterised as a fiscal stimulus.
- On procurement, he asked if there is an economic rationale for focusing on small, black-owned, woman-owned, and youth-owned businesses.
- He asked the PBO to come back to the Committee and report on the assessment of incentives schemes, specifically asking if South Africans are getting a concomitant return on these incentives.
Dr Mohamed said a lot of the questions require research to give an adequate response. It is difficult to give an assessment of what specific departments are doing. This is because of difficulties with keeping track, in real time, amidst the pandemic. The PBO does not have day-to-day contact with the different departments and spheres of government as the Financial and Fiscal Commission (FFC) or National Treasury do.
The risk associated with approaching the IMF is the issue of conditionality and the impact on the country’s sovereignty. The implications so far, in the negotiations with the IMF around the R4 billion available to the country, are low interest rates and limited conditions. These still need to be clarified in the process. If a loan is taken from the IMF, the impact of pressure and moral suasion on the country’s policies in the long-run must be considered. There is also an exchange-rate risk, which creates the possibility of constraints on the balance of payments. There is a deficit on the current account and the recent increases in downgrades may exacerbate the issue as well. Risk can be mitigated by maintaining our balance of payments well.
The PBO did a report on industrial incentives in 2017. It is discussing updating the study and presenting it to the Committee. At the time, it was difficult to ascertain some of the success because of the slow recovery from the global financial crises. If another study is done, it will have to take into account the impact of COVID-19. The report must be tailored to see how it can help with disaster response.
Fiscal stimulus creates the expectation of the economy being stimulated. At this stage, the government is trying to mitigate the impacts of the disaster, so it is more of a fiscal relief than fiscal stimulus.
Dr Jantjies said, with procurement and SMMEs, there is an issue of transparency and compliance. The PBOs conversations with the Finance Committee noted a need to reassess government incentives and its impact. The Committee can also find out from National Treasury and the Department which incentives must be reviewed, and alternatives. There must be more understanding on the conditions around the guarantee scheme to account for it in the balance sheet. At the moment, it looks like it will be a note on the balance sheet.
Mr Emam said authorities such as National Treasury identified a massive skills shortage within all government spheres. On further investigation, it found a lot of employees have 2-3 degrees yet it still does not translate into delivery. The question was, what is the cause of this, is there a problem with the level of education or is more training required.
Dr Mohamed said the skills shortage problem is a national one and is probably the same for the private sector. There may be other institutional and funding issues affecting delivery, for example, the planning and allocation of resources in departments is not always done in the best possible way.
Dr Orlandi said the PBO’s research on the NDP, Medium Term Strategic Framework (MTSF), and on the conditional grant, confirms a skills shortage in performance. Parliament must insist on programme reviews. Often when this must be done, the relevant data is not available. When it eventually becomes available, it is no longer related to the current expenditure trends. Dr Orlandi said she will like to present PBO’s research on programme performance management systems in government, and what is needed to improve it, to the Committee.
The Chairperson asked how much SMMEs, black, women, and youth-owned companies contribute to the economy, and if a percentage of the contribution is available.
Dr Mohamed agreed the contribution of different types of ownership must be measured. Better sources of information on the contributions must be tapped into. The starting point is within government, such as the DTI and Stats SA. This is something the PBO can look into. The rationale behind purchasing from businesses with different forms of ownership comes from South Africa’s legacy, and its concentrated economy. Issues of transformation cannot be ignored, even during a disaster. The country’s high economic inequality and history make it important to ensure people are not excluded from economic activity.
Dr Dumisani said a few years ago there was a study on the contribution of SMMEs and the different ownership companies. It found SMMEs unintentionally contribute bigger proportions of income to tax revenue than larger and more historically established companies.
Adoption of the minutes
The Chairperson had to leave. In his absence, the Acting Chairperson, Mr X Qayiso (ANC), chaired the adoption of minutes with amendments. He proposed the adoption of meeting minutes for th17March and 30 April 2020.
Mr Joseph asked if there were any apologies. He proposed amendments in the introduction and the addition of ‘Dr’ to the relevant PBO representatives named.
The Committee Secretary confirmed no apologies received. Ms Peters moved for the adoption of the minutes and Ms Dikgale seconded the adoption.
The minutes with the amendments were adopted.
The Acting Chairperson proposed the adoption of the minutes of 4 May 2020.
Mr Joseph asked if there were any apologies. He proposed an amendment on the fourth line of page four.
Ms Dikgale proposed the addition of ‘Dr’ to the relevant PBO representatives named.
Ms Peters moved for the adoption of the minutes.
Mr Mlenzana seconded the adoption.
The minutes with the amendments were adopted.
The Chairperson came back to the meeting to chair it. He said the response from the Minister of Finance will be circulated by the Committee Secretary, and asked Members to please go over it. He thanked the Members and presenters for participation.
The meeting was adjourned.
Download as PDF
You can download this page as a PDF using your browser's print functionality. Click on the "Print" button below and select the "PDF" option under destinations/printers.
See detailed instructions for your browser here.