FFC on COVID-19 fiscal impact & suggestions for adjustments budget

Meeting report

Financial and Fiscal Commission (FFC): Impact of Covid-19

Prof Daniel Plaatjies, Chairperson: Financial and Fiscal Commission (FFC), said the 2020 budget had been formulated against the backdrop of a deteriorating economic environment, in which growth had been on a constant slow downward trend since the 2009 financial crisis. The cost of losing the last investment grade rating, coupled with the COVID-19 pandemic, had weighed down all prospects for an economic turnaround in 2020. The pandemic had turned the February budget upside down, as the need to deal with health challenges, deliver on essential services, protect households against wage and livelihood losses, and protect businesses against falling markets, had amplified.

Mr Thando Ngozo, Senior Researcher:  Macroeconomics and Public Finance Unit, FFC, said global growth was expected to contract severely in 2020 because of COVID-19. The implications for the South African economy were:

• Disruption in trade and value chains, affecting commodity exports.
• Reduction in foreign financing flow i.e., foreign direct investment (FDI).

The aggressive containment measures, heightened uncertainty, financial market turmoil, and stringent cross-border travel restrictions were expected to weaken global growth.

South Africa’s economy was faltering before COVID-19, and the impact of COVID-19 would push the country into a deep economic contraction this year. This was because of disruptions in household and business spending on transport, food and beverages, and entertainment, as well as prolonged pressure on exports. The recent sovereign credit downgrade to junk status would exacerbate this. For instance, the Moody’s Investor’s Service downgrade from Baa3b to Ba1 means South Africa lost its membership to the World Government Bond Index. It would increase the costs of borrowing and further worsen debt sustainability prospects.

The projections for GDP growth in the country for 2020 were between -5% and -20%, according to different institutions. The 2020 budget projected the fiscal deficit to widen from -4.2 percent of GDP in 2018 to -6.8 percent of GDP in 2020, but the International Monetary Fund (IMF) projects the fiscal deficit would widen from -4.1 percent of GDP in 2018 to -13.3 percent of GDP in 2020 because of the COVID-19 pandemic.

Government debt was expected to increase by R869 billion over the medium term. It was not expected to stabilise over the medium term, as it was expected to increase to R4.38 trillion, or 71.6 per cent of GDP, by 2022/23. The impact of COVID-19 on the increasing government debt as a percentage of GDP, was shown in slide 17.

Ms Sasha Peters, Programme Manager: National Budget Analysis Unit, FFC, presented an overview of the Commission’s response to the revenue and expenditure proposals in the 2020 Budget. The real growth rate in expenditure for 2016/17 – 2019/20 showed a focus on economic development, community development and social development. Peace and security and general public services bore the brunt of reductions.  The Commission cautioned on spending on debt service costs, which was projected to become larger than community development and health spending.

She said that tax revenue was underperforming. The South African Revenue Service (SARS) had projected a revenue under-recovery of R285 million. The cost of Covid-19 tax relief measures was estimated at R70 billion. The FFC recommended that tax policy should prioritise fiscal support to ensure that the economy survives the pandemic, because under the current circumstances increasing tax revenues was not a feasible policy option. The reduction in the wage bill was one of the key risk areas in terms of public servants bearing the full burden of the need to reduce expenditure.

Mr Eddie Rakabe, Programme Manager: Fiscal Policy Unit, FFC, presented the COVID-19 fiscal and monetary responses for transformation and growth. He said that the fiscal framework tabled in February was no longer attainable due to the Covid-19 induced economic shutdown and slump. The Government had introduced a combined fiscal and monetary response amounting to R1 trillion. He elaborated on the policy interventions for effective stimulus, such as extended unemployment insurance benefits, and explained what the monetary response package included. He presented five funding sources for the COVID-19 fiscal response and the impact of COVID-19 on tax measures. Both the fiscal and monetary response in their totality represented a relief measure, rather than a stimulus. Only R95 billion could be considered a fiscal stimulus or new injection, which fell too short of the expected shock to the economy. A more aggressive bond purchase programme by the South African Reserve Bank (SARB) was feasible and warranted a substantially strengthened liquidity in the markets. He elaborated on the FFC’s response towards the government’s reform agenda and proposed interventions. The Commission recommended that the cycle of low growth and high inequality must be broken through bold actions aimed at giving poor South Africans better access to good jobs so that they could participate fully in the economy

Dr Mkhululi Ncube, Programme Manager: Local Government Unit, FFC, explained where the money would come from, in response to COVID-19. He elaborated on the basis for reprioritisation, and presented an overview of potential areas for reprioritisation according to a three-pronged approach - a recommended reprioritisation by department, areas for cross-cutting within all departments, and reprioritisation of conditional grants. He explained other opportunities for cost-saving, such as instilling a culture that was intolerant of waste and corruption, and investing in digital technologies to improve efficiency.

Dr Kay Brown, Chief Executive Officer: FFC, highlighted the Commission’s recommendations on the economy. It recommended that government consider relaxing the fiscal consolidation stance, and this must be accompanied by reform focusing on digital education, land reform and agriculture for food security, improving governance and fighting corruption, and reviewing the subsidy framework for social programmes.

The Commission thus proposed that government’s  fiscal response to Covid-19 should be guided by the following sequencing principle:

• Short term - support stability of the health care system and reimburse provinces for the additional cost burden .
• Medium term - focus on preventing socio-economic hardships, ensuring food security and preserving livelihood strategies for the poor, unemployed and the vulnerable households (child-headed households and the elderly).
• Long term - implement a bolder fiscal stimulus package to boost the economy through consumption and investment.

The Commission also recommends that the fiscal and monetary allocations be distributed equitably across sub-national governments and business sectors. Lastly, it advises that when the adjustments budget is tabled, it should be passed as soon as possible in order to give government institutions certainty regarding their budget baselines, and for them to be able to plan accordingly for service delivery against both decreases and increases in spending areas.

Prof Plaatjies pointed out that the FFC was aware that the President and Minister of Finance had mentioned fiscal response and relief, and not stimulus packages. However, the media was going with the idea of stimulus packages. He stressed the powerful role the state could play in using public resources, and emphasised that this should not be underestimated.

(See presentation)

Discussion

Mr Z Mlenzana (ANC) asked if the second bullet on slide 20 suggested making sacrifices to the peace and security Department clusters. Which other Departments should face cuts? He requested the FFC to comment further on the issue of the wage bill. Were the 56.4% unemployed young people who had been mentioned simply unemployed, or were they unemployable?  He remarked that the unemployment issue could be tackled through recruitment in response to COVID-19. How did the FFC link the issue of under-spending with the capacity to spend?

Dr Brown clarified that slide 20 showed what the 2020 budget was proposing for the next three years. Therefore, the budget currently showed that those department clusters bore the brunt of reductions. However, as government moved towards the adjustment budget, the FFC thought that the extent of the cuts would need to be rethought, as some of the departments in these clusters were vital to combating COVID-19. The FFC believed that there was still room to cut in infrastructure spending, but only if the upgrade spending could be deferred without significant deterioration of assets.

Dr Ncube said the FFC was aware of the issue of under-spending. If there was a department that exhibited continual under-spending, then there was room for reprioritisation. Under-spending performance needed to be looked at holistically, because it could be under-spending due to capacity issues. If that was the case, then capacity first needed to be built before funds could be cut.

Mr A Shaik Emam (NFP) said that on the ground, the results were different. Unemployment was expected to increase substantially, and several businesses were shutting down daily. This, along with high levels of corruption, added to the large amount of money lost in the country. He asked the FFC how it thought government was going to achieve its reform agenda amidst all these challenges and what had been happing for the past 26 years. What did it suggest the government should do to reduce the high cost of doing business in South Africa? If government were to initiate the plan to provide fully-serviced sites, would it not improve the economic development status of the country? He raised concerns about how development issues had been talked about for years, but there was no commitment when it came to implementation.

Prof Plaatjies said that government needed to be more decisive about cutting under-performing programmes across the spectrum. Continuously rescuing did not help. Government needed to push for creating new industries and markets that everyone would have access to.

Mr D Jospeh (DA) asked if special task teams within all departments would be created to deal with all austerity measures mentioned in the presentation, or would National Treasury take on the implementation of the proposals. Which committee or institution must drive the proposals on slides 48-50? Who would take responsibility for identifying the essential or non-essential services? He asked the FFC to explain what was going on in the illegal tobacco and alcohol market. Why was government unable to tackle that illegal market? This gap must be closed in order to build state capacity. He was concerned with the reprioritisation proposals within the Department of Health. There was currently a crisis, and government should not take too much away.

Prof Plaatjies responded that the FFC did not know if there were designated task teams. The reorganisation of the state did not have to do only with structural issues, but also the reorganisation of functionalities and programmes of the state. The issue of illegal market leakages required ramping up public employment. He clarified that the FFC was not saying that austerity measures should be applied in the health budget. Instead, the health budget needed to be remodelled in order to bring more funds into the health sector to respond to personal protective equipment (PPE) shortages, and the transformation of centres to hospitals. The issue being raised was diverting some of the funds. Prof Plaatjies said that the supply chain system and policies needed to be relooked at, to deal with where fiscal leakage and corruption happened. COVID-19 could either be an equaliser or further deepen inequality.

Mr X Qayiso (ANC) said he found the FFC’s suggestion to effect reprioritisation in training and development to be controversial and inconsistent. Would this really be helpful? In comparison to the 1929 Great Depression and the 2008 Global Financial Crisis, how did the FFC measure the magnitude of COVID-19? Did some areas of the government’s 2030 Vision need re-alignment, given the current situation?

Dr Ncube agreed that there was a need to continuously upgrade state capacity, especially through training staff in government departments. However, if training was not planned or related to COVID-19, then there was room for reprioritisation. Some of the planned training was not essential.

Mr O Mathafa (ANC) said the FFC’s presentation was empowering. Had it checked the general trend of credit ratings around the world and if so, had it compared South Africa’s status with other countries? Did the credit rating agencies have pre-determined areas of assessment, or was the rating done country by country? He pointed out that Italy’s rating was stable, whereas South Africa’s was negative. However, Italy’s debt-to-gross domestic product (GDP) ratio was 143%, whereas South Africa’s was 62%. Italy’s projected economic contraction was 6%, and South Africa’s was a contraction of 0.3%. Given the disparity in these results, South Africa’s credit rating status did not make sense.

The government’s fiscal consolidation stance was to stimulate economic growth and prevent downgrades, among other things. Did the FFC think government should remain as it was regarding fiscal consolidation, or should it be more aggressive in its spending patterns and approach?

Mr Chen-Wei Tseng, Research Specialist, FFC, said that the debt to GDP ratio was not the best marker of fiscal sustainability. There were key hidden variables that determined the debt to GDP ratio. Credit rating agencies looked at a variety of factors, such as the balance of payments, the primary budget balance – which indicates fiscal credibility -- and the independence of the monetary sector. The rating gives a mark on how likely South Africa was to pay back what it had borrowed. The implication of the downgrades was that the cost of borrowing was increasing for South Africa. Mr Tseng said that what was important to the Committee was the ability of the budget to focus on fiscal credibility. 

Mr Rakabe said one of the factors the credit rating agencies took into account was the strength of the economy. Italy and Brazil had stronger economies than South Africa, which was shown by their higher income per capita. Even though they took up a larger debt, their market strength would enable those countries to pay it back. The agencies look at the structural balances in the economy.

Ms D Peters (ANC) asked how South Africa’s credit rating was faring compared to other BRICS (Brazil-Russia-India-China-SA) countries, especially in comparison to Brazil, which had been severely affected by COVID-19. If the debt to GDP rose to over 100% by 2021, what were the implications of this? What was the FFC’s view on the social relief grants, such as the R350 top-up? Did it foresee challenges regarding the social distress of relief? She raised concerns around vandalism to existing infrastructure and the issue of escalation costs in delayed infrastructure. What did the FFC consider to be a reasonable contingency reserve? She said the notion of non-COVID expenditure being delayed created another challenge of service delivery within communities. What did the FFC suggest must be done about other services?

Prof Plaatjies said that in comparison to other BRICS countries, Brazil was two classes behind the junk status, while Russia, India and China were at higher investment grades. South Africa was at junk status. He also added that the issue of vandalism suggested that public employment needed to be looked at. Regarding the relief grants, there was uncertainty on where COVID-19 would land, making it difficult to make predictions. The FFC did not have an answer as to whether the fiscal contingency reserve was reasonable, because the “purse was depleted”. There was an ongoing tax deficit, so the FFC would go and look further into this and come back to the Committee.

The Chairperson asked what areas government should concentrate on to soften the blow of the COVID-19 pandemic. Which policy interventions would have the biggest multiplier effect on poverty alleviation, employment creation and inequality reduction? He requested that in future presentations, the FFC should start looking more into broad-based black economic empowerment (BBBEE) initiatives and employment equity. It should report on the progress of BBBEE and the impact of COVID-19 on the patterns of ownership in the economy. Apart from reprioritisation and multilateral institutions, what were other sources of funding for government expenditure? Had the FFC looked at the performance of other countries and the sources of income? Both the fiscal and monetary interventions were estimated at R1 trillion. What was the impact of this going to be? What was the significance of the repurchasing of Treasury bonds in the secondary market? The Chairperson asked if it was true that only R95 billion was new money.  

Mr Ngozo responded that the FFC viewed this period as one of stabilisation when it came to fiscal policy. Therefore, increasing taxes during this period would not be feasible, as households and companies were also facing revenue losses. He warned that a wealth tax required a lot of work before it could be implemented, and there was also the issue of ensuring high-net wealthy South Africans were included and could be taxed. SARS needed to have a specialised unit that looked at the illegal activities that contribute to the tax decline.

Mr Rakabe said the assessment that only R95 billion constituted a new injection, was made from the premise that a fiscal stimulus package was an injection above the current baseline. A fiscal stimulus would therefore be additional spending on top of the R1.9 trillion tabled in the February budget. The R130 billion reprioritisation did not constitute additional spending. The same applied to the credit guarantee scheme, which was a contingent liability, not additional spending. Therefore, from the R500 billion, only R95 million constituted a new injection.

Regarding the reserve bank interventions, there was currently a debate on whether the repurchase agreement of bonds in the secondary market was part of the SARB’s open-market transactions or part of the stimulus. At the time of intervention, there was a risk of sell-off, thus forcing the SARB to buy through the secondary market. The argument being debated now was whether the SARB could afford to finance the bonds directly, so the FFC suggests that government should look at whether it could deploy its entire balance sheet. If government decided to do this, the decision also needed to be balanced with maintaining the SARB’s independence.  

The Chairperson requested the FFC to relook at the statement that both fiscal and monetary policy resulted in a stimulus of only R95 billion. Perhaps this figure was related only to the fiscal side, but what of the monetary policy effect, given the reduction in the interest rate?

Prof Plaatjies said that the FFC would respond to some of the concerns raised in detail in the near future. It had requested data from Unemployment Insurance Fund (UIF) commissioner and the South African Social Security Agency (SASSA) to better understand South Africans and their experiences.

He added that the remodelling of education needed to happen. The country had to look at incorporating information communication technology (ICT) and the digitisation of education. The cost of data needed to be cut. He also suggested cutting import taxes on books and learner support material. He emphasised that the land reform programme had to take into consideration food security, food availability and emerging black farmers.

Adoption of Meeting Minutes

The Committee considered the adoption of the minutes of its meeting on May 20.

Mr Joseph suggested amendments on page 7, specifically the second sentence in paragraph two regarding the Land Bank. He said that the statement telling the Land Bank to prepare a paper was premature. He also suggested that the Land Bank’s response be added in paragraph three of page 8. Lastly, he corrected the spelling of his surname in the section that indicated his move for the adoption of the minutes of 6 May.

Ms Peters disagreed that the second sentence was premature, as the Land Bank was a key instrument in facilitating and implementing section 25 of the constitutional mandate. 

Mr Qayiso expressed his agreement with Ms Peters.   

Mr Joseph clarified that the Land Bank was failing with the current reform. He was not disagreeing with the principle of the statement, but it could come only at a later stage.

Ms Peters said the Committee did not have the privilege of time to call on the Land Bank to return. The statement required the Land Bank to follow, prepare and position itself for reform.

Mr Sifiso Magagula, Committee Researcher, assisted the Committee by pointing out that the Committee Secretariat did not choose what to put in the meeting minutes, and what not to. The minutes were simply a reflection of the discussion.

The Chairperson requested the Committee Secretary to include Mr Joseph’s sentiments in the meeting minutes, and that the amended minutes be circulated to Members. He agreed with Mr Magagula that the minutes were a reflection of the discussion that transpired during the meeting.

Mr Qayiso moved for the adoption of the minutes, with the proposed amendments.

Mr Mlenzana seconded the motion.

The minutes with the amendments were adopted.

Closing remarks

The Chairperson thanked the Members and presenters, and announced that the next meeting would begin at 6pm tomorrow.  He added that the response from the Minister of Finance would be circulated by the Committee Secretary, and requested Members to please go over it. 

The meeting was adjourned.