2020 Revised Fiscal Framework: PBO & FFC inputs

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Finance Standing Committee

30 June 2020
Chairperson: Mr J Maswanganyi (ANC); Mr Y Carrim (ANC, KwaZulu-Natal)
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Meeting Summary

Video: Joint Committee: Standing Committee on Finance and Select Committee on Finance, 30 June 2020
Audio: 2020 Revised Fiscal Framework: PBO & Financial and Fiscal Commission briefing

2020 Supplementary Budget Speech, Bills & Key documents

The Parliamentary Budget Office (PBO) presentation provided context and raised important policy considerations for the future of the country with the impact of the global pandemic on an economy that was already in bad shape considering the credit downgrade that took place just before the pandemic began to be felt by the nation. Food security, agriculture and joblessness are issues of continued concern and the poor economic conditions will affect public finances. It noted the new primary priorities are the response to the COVID-19 pandemic with frontline sectors being public health, social development and peace and security. The PBO concluded by asking Parliament to pay attention and provide more oversight to ensure that local government delivers in supporting the rest of government as the conduct of government would affect future generations. It suggested that government’s economic approach to fiscal policy is outdated.

Members asked about the accuracy of the projection which project a sharp improvement in the economy throughout 2021. They asked if the PBO was calculating the province health and education budgets as their adjustment budgets are still to be presented in the coming weeks.

The Financial and Fiscal Commission (FFC) submission said only R95 billion of the government's R500 billion fiscal package can be considered a new injection into the economy. This falls far too short for the expected shock to the economy. Delays in release of this relief have affected some businesses. FFC recommended that government reconsider the sequencing of its three phases for managing the pandemic. It explained that the revised budget is not final, as there is another appropriations adjustment later in the year so any surplus may be flagged for reprioritisation later in the financial year. It gave advice on expenditure reform, cautioned against tax increases as a form of increasing revenue as well as on the move to zero-based budgeting. Finally, it emphasised the delay in releasing the relief packages is damaging to the economy and must be curtailed. To this end, the FFC called for Parliament to conduct stringent oversight over the proposed reprioritisation budgets and revenue plans in all government spheres.

Meeting report

Parliamentary Budget Office (PBO) on 2020 Revised Fiscal Framework
Dr Seeraj Mohamed, PBO Deputy Director of Economics, noted that the last slides speak to the way forward, looking towards the Medium Term Budget Policy Statement (MTBPS) in October and he acknowledged the probability that he will not have time to present on them. He nevertheless considered it important to mention them because it was important consider what the fiscal framework should be into the future.

He referenced President Ramaphosa’s comments on the need for the 2020 Supplementary Budget to get the economy back on the path of recovery that included a “care economy” and a “green economy “. The President spoke about achieving a social compact of inclusive growth by providing care packages where necessary in the future to support small and medium sized enterprises. He spoke about shifting some of the production and manufacturing sector to be more inward looking rather than export orientated as a result of the breakdown in global value chains and the attitudes towards trade in global markets – particularly to produce our own food and healthcare supplies. The informal sector was to be strengthened along with job creation.

Deep global and domestic recession
Dr Mohamed noted that because the country was already in recession, and the future is uncertain and there is no clear estimate as to how bad things are going to get or how many waves of new infection there will be, the outlook for South Africa looks worse than it does for other developing countries. There is an expectation that bankruptcies and unemployment will increase a lot. There are additional slides at the end which speak to the numbers of bankruptcies and planned retrenchments as well as Quarter 1 data on unemployment which does not deal yet with the real impact of COVID-19.

Impact of COVID on consumption of SA households
Based on the Statistics SA survey conducted for the period 26 March to 6 May 2020, the graph depicts that salaries and wages have declined during lockdown with a high percentage of households indicating in the survey that they had no income. Additionally, 41% of people need to incur new debt to cover their expenses. Wages and salaries have decreased in most households.

Increasing levels of poverty and food insecurity
73% of the population were estimated as being either chronic poor, transient poor vulnerable. Additionally, even a good share of the middle class is becoming more vulnerable, taking on more debt. Consequences of the pandemic are harsher on the poor. He noted that it takes just five weeks for a healthy baby to become malnourished, underweight and be at risk of stunting, which would lead to life-long medication.

A large number of households were already in poverty before COVID-19.

The health and welfare of future generations depend on government actions and spending today.

Government decides on the size of the response, the distribution of the costs and allocation of resource across society.

Government policy stance to support recovery
Now is not the time to instil increased panic. It is time for firm and caring leadership. Government is the anchor during these difficult times. The timeframe of government should not rapidly pivot to fiscal consolidation. It should rather accept that the budget deficit and debt-to-GDP will grow and have to remain high for a number of years.

Revised fiscal framework for 2021
Mr Rashaad Amra, PBO Economist, compared the budget presented in February 2020 to what was presented on 24 June. The biggest change has been significant downward revision to main budget revenue owing to the change in economic outlook and the massive shortfalls observed in the first quarter of the current fiscal year along with the requirement for additional financing. Importantly, there are no changes over the medium term and this should be visible in the MTBPS.

Poor economic performance affects public finances
There is a large increase in debt as a share of GDP which is a concern as a larger percent of income is used for debt servicing costs. Higher interest rates will be required by lenders as a way of securing the risk.

Outlook for public finances
The outlook for public finances is where the rubber meets the road as there has been an unfavourable trajectory over the past few years as the gap between revenue and expenditure continues to widen. Debt has increased, debt servicing costs have increased and borrowing costs have increased. The increase in the green line on the bottom right-hand diagram has seen a sharp increase since the beginning of this year, in part, due to the downgrade to credit ratings as well as due to the elevated risks associated with slow growth, compounded by the global crisis and its implications for the economy.

On the left-hand side, what is required for debt to stabilise over the medium term is for the debt servicing costs to be lower than nominal growth. The left-hand graph shows that debt servicing costs are increasing much faster than nominal GDP growth, most noticeably from about 2010.

Fiscal framework and credit rating within current global context
Mr Amra considered it important to contextualise South Africa’s fiscal situation in light of the rest of the world. Although other countries have also faced credit downgrades since the global pandemic, South Africa was already in a tricky position prior to the pandemic. What is important now is for expenditure to respond to both the health crisis and the economic crisis. The latter includes addressing livelihoods, preventing poverty and malnourishment to the extent this is possible. This will require a strong thrust on the part of government expenditure to save the economy from worse implications in years two and three and beyond.

Refocusing of current priorities
Ms Nelia Orlandi, PBO Policy Analyst, spoke to the pre-lockdown priorities which were strengthening the macroeconomic framework by spending on education, healthcare and social development as well as modernising "network industries" and restructuring our state owned enterprises, opening markets to trade with the rest of the continent, lowering the cost of doing business, and creating jobs in sectors such as agriculture and tourism.

Now, the primary priorities are to respond to the COVID-19 pandemic with frontline sectors being public health, social development and peace and security. In terms of primary health, capacity of public health services is being scaled up and the private sector is supplementing public sector capacity.

Reprioritisation
In line with the new priorities, funds have been re-prioritised according to the graphs presented. The change to non-interest expenditure amounts to R36 billion, of whichR19.6 billion is a provisional allocation.

Other expenditure adjustments amount to R145 billion. The proposed downward adjustments include suspensions of national department baselines, repurposing of the provincial equitable share and provincial conditional grant suspensions.

Suspension of baselines in a selection of National Departments
Cooperative Governance, National Treasury, Health, Defence, Social Development, Police have seen positive total net changes, whilst other departments have seen decreases.

Meaning of suspensions in practice.
Filling of vacancies is suspended until later in the financial year.

Local government equitable share to support municipalities with increased expenditures including services and homeless shelters

Most conditional grants mean a delay in planned projects to use towards unplanned COVID-19 interventions.

New infrastructure projects will be delayed as R600 million has been reprioritised for the provision of water and water tanks to 3 433 schools without access to potable water.

A portion of land restitution payments will be postponed and fewer farmers will be supported due to restrictions on economic activity.

Allocations for incentives to public corporations and private enterprises will be suspended as a result of the restrictions on economic activity. The presentation detailed rail and road agency reductions.

Repurposing of Provincial Equitable Share Towards Health
Of the R20 billion increase in the reprioritised health budget, only R15 billion has really gone into the health sector, and the presentation provides a breakdown of reprioritised funds by province.

In total, R26.8 billion has been suspended and R16 billion has been reallocated, which indicates that there was a reduction of R10.7 billion of conditional grants.

Government response to COVID-19 so far
Preliminary outcomes to the immediate responses to the pandemic show that over 2% of the population has been tested—about 1.2 million people however there is a testing backlog. Additional funding for personal protective equipment is required. In terms of social relief basic income grant, by 18 June, only 1.2 million out of 6.2 million applicants had been paid. In terms of municipal allocation, so far only R5 billion of the R20 billion has been spent, but this may be because of the financial year difference between national/provincial and local government. By 19 June 2020 only 355 267 out of 2.4 million employers had been paid. There are no recent estimates of tax relief uptake. Stats SA reports in an April survey that only 4.25% of business owning respondents had made use of the various tax deferral programmes; however, smaller businesses are struggling to apply.

Mr Dumisani Jantjies, PBO Deputy Director: Finance, continued due to Ms Nelia’s connectivity issues. He noted the question remains whether government's response has been adequate to meet needs.

COVID 19 weighs heavily on government revenue
PBO undertook to provide estimates in response to the MTBPS in October based on revenue collection. The main reasons for a revenue shortfall are tax relief, job losses, lack of demand in the economy and closure of businesses as more than 80% of government revenue comes from income and consumption taxes. Poor growth will lead to further contraction.

Relief measures for business and individuals
Informal businesses and small medium enterprises have struggled to take up this relief.Lack of demand in the economy has affected VAT receipts, however tax relief has tried to balance this out.

Tax expenditure estimates
Tax expenditure of 2017/18 estimated at R210 billion or 17.3% of gross tax revenue. Mr Jantjies suggested that this may be why government may be trying to reduce tax expenditure.

Municipal and Metro Revenue 2019/20
Local government is a very important stakeholder during the crisis, particularly as municipalities have to come with responses to COVID-19 related pressures. Government has accordingly shifted budgets to support it.

Mr Jantjies emphasised the importance of Parliament paying attention and providing more oversight in ensuring that local government delivers in supporting the rest of government. Since March 2020, municipal collection of revenue has been on par with previous years, however metro revenue collection has seen a slight decline. Municipal expenditure has been mainly in line with prior years, but not so in metros.

Discussion
Mr G Hill-Lewis (DA) noted slides 16 and 17 in reference to basic and higher education getting a R12.5 billion increase, however on the next slide it seems they are actually losing R12.5 billion. He noted the same for health and social development and asked if PBO was calculating the budgets of provinces as well, because the provinces are entitled to set their own budgets and their adjustment budgets are still to be presented in the coming weeks. He asked for the allocations to be explained.

Dr D George (DA) commented on the graph on slide 5 which predicted a V-shaped recovery of the economy to pre COVID-19 levels through 2021. The graph depicted a sharp decline in 2020 and a sharp incline in 2021. It would be good to see this but he was doubtful and asked how certain PBO is of that outlook.

PBO response
Dr Mohamed replied that the predictions were not PBO's own forecast but were based on projections made by institutions such as the IMF, World Bank, South African Reserve Bank, National Treasury and a few others. PBO has either used the projected median from their data or presented National Treasury figures.

Ms Orlandi replied to Mr Hill-Lewis that it is not new funding. Health received R21 billion and she would provide more details via email.

Financial and Fiscal Commission on 2020 Revised Fiscal Framework
Prof Daniel Plaatjies, FFC Chairperson, introduced the new Commissioners: Deputy Chairperson, Michael Sachs; Commissioner Elzabe Rockman and most recently appointed, Commissioner Sikhumbuzo Kholwane. He noted that the Commission is now a full house owing to the new commissioners.

The Committee Chairperson welcomed the new Commissioners, saying that he knew some of them. He had worked with Trevor Fowler for some time in local government. He encouraged the Commissioners to give input to questions and comments made by Committee members.

Mr Eddie Rakabe, FFC Program Manager: Fiscal Policy Unit, noted that the state of disaster has necessitated drastic adjustment to the budget. The Minister of Finance is empowered to make an adjustment budget when met with unforeseen circumstances. An adjustment budget was necessary to mitigate the downsides of responding to the COVID-19 crisis. The main point the FFC wants to highlight is that government was forced to make budgetary adjustments within a very short period of time.This makes it difficult to follow a systematic re-prioritisation framework that is growth enhancing.

Towards a Bolder Stimulus
On 26 May 2020, the FFC Commission presented to the Appropriations Committee that the estimated GDP growth in 2020 would contract significantly. Only R95 billion of the government's R500 billion fiscal package can be considered a new injection into the economy. As 2020 GDP growth will contract significantly, fiscal and monetary support must be able to meet the magnitude of the contraction. FFC considered only R95 billion as a fiscal stimulus, which falls far too short of the expected shock to the economy. Delays in release of this relief have affected some businesses.

Need for Bolder Reform Agenda
Government should consider relaxing its fiscal consolidation stance on condition that the spending increase is directed at social relief in the short run and growth-inducing activities in the long run.

Deep Global and local Growth contraction
FFC agreed with the PBO that it would take a lot to get South Africa to its pre COVID-19 position, which was not very strong to start with.

SA sovereign credit rating deterioration
The credit rating downgrading will affect government’s ability to meet borrowing requirements, raise revenue to meet social needs and its ability to meet debt servicing costs.

Budget Deficit is ballooning
Debt reduction and debt stabilisation targets are becoming increasingly elusive with every budget that is tabled. This leaves limited fiscal space. Targets set are not met and this is exacerbated by the current uncertain economic environment. Government is going to have to have to embark on drastic expenditure reforms to stabilise debt and enhance growth. When the Minister tabled the adjustment budget, it also indicated that about R230 billion in expenditure will have to be cut over the next two years. The FFC advises that a delicate balance be struck between expenditure reduction and meeting basic needs. As expenditure is reduced, it needs to ensure that critical social services are not compromised

Public Expenditure and Economic Growth
Public expenditure is important for economic growth. Economic growth also drives government expenditure. From a policy perspective, this would mean that government needs to focus on creating a more conducive environment for growth. This speaks to the issue of the reforms necessary to speed up growth

COVID 19 impact on employment and joblessness
The unemployment situation is worsening. Based on Stats SA statistics, 38 000 jobs were lost in the first quarter of 2020. Quarter 2 stats are awaited.

By Occupation and Industry
The people losing jobs are skilled people, which is positive only in the sense that they are more likely to find new jobs. There are questions as to why jobs are being lost in the social sector, since it is a key resource to government during the crisis.

Revised fiscal framework
PBO spoke to this so Mr Rakabe did not repeat it in detail.

Adjustment to main budget framework
The main item to highlight is that the deficit is mainly driven by declining revenue. The deficit is not a result of runaway increases in expenditure.

Main budget revenue
As long as the economy does not grow, there will be a wedge between expenditure and revenue.

Adjustment by function category
He flagged that transfers and subsidies will receive the largest portion of the adjustment budget. This will be about R12.3 billion. This will mainly go to municipalities as they are key to implementing government responses.

Share of consolidated expenditure by function
Mr Rakabe affirmed what had been said by PBO, which is that Social Development and Peace and Security are getting the largest portions of the adjustment budget.

Allocation of adjusted budget
If the re-prioritisation is not done systematically, it will have implications on the budget structure of municipalities and provinces as well as for service delivery in the long run. Provinces being left alone for re-prioritisation may be good for decentralisation, however the re-prioritisation may see uneven service delivery per province. Of the R20 billion announced as part of the relief package for local government, the FFC assessment can find only R11 billion currently being given to local government. It is likely that the shortfall will be added to local government baselines.

Reprioritisation criteria
Mr Rakabe did not go into detail but provided the criteria used.

Continuous baseline cuts
Mr Rakabe emphasised the reprioritisation of key conditional grants. He added that if reprioritisation continues as it has been since 2017, many conditional grants will remain unspent.

The National Department of Tourism and the Department of Military Veterans will be the most affected by the adjustment. This is to be expected and is welcome, particularly in the tourism sector, as due to the lockdown, it will find itself unable to spend the funds appropriated to them.

Budget 2020 vs Proposed adjustment allocations of Provincial Grants
Here the FFC would like to caution the overloading of conditional grants with too many objectives. Rather than allocating money through conditional grants, it should rather go through the provincial equitable share.

Changes to the division of revenue
The total non-interest expenditure of R1 536 trillion tabled in February has been revised upwards by 2% to R1 572 trillion. The bulk of the reprioritised funding is reallocated to national government to support vulnerable households and health. Overall provinces carry the heaviest burden of the expenditure reductions.

Provincial budget repurposing
75% of the re-prioritised budget will be directed at Health, therefore, the concern the FFC would like to highlight is the seeming blanket approach being applied across all provinces. With 0.0028% being allocated to each province, despite the impact of COVID-19 not being uniform across all the provinces. This method should not be used in re-prioritisation as different provinces face different challenges in their health sectors.

Budget and policy considerations for the MTBPS
FFC recommended that government reconsider the sequencing of the phases for managing the pandemic. In the adjustment budget, the Minister announced that government will be looking at three phases: phase one preserving the economy; phase two recovering jobs and investment and phase three pivoting the economy, which is more about reforms. FFC recommended that phase two support for investment and employment must be underpinned by economic reforms which is phase three, to achieve the targeted interventions. The sequencing change would enable government to best be able to target interventions.

Expenditure reform
These strategies essentially consist of three main elements: ensuring the sustainability of social spending and the public wage bill; achieving efficiency gains while paying due regard to equity; and establishing institutions that promote spending control and enhance its effectiveness. Therefore, the capacity of treasuries needs to be strengthened to ensure that they promote spending control and enhance spending effectiveness.

 Zero-based budgeting
The FFC acknowledged the zero-based budgeting announcement but is concerned about the effectiveness of changing the budget structure considering the time and resources needed to operationalise zero-based budgeting. There are issues that need to be addressed before moving full steam ahead with this reform.

Damaging delay in releasing relief packages
Relief delay exacerbates the extent of damage in the economy, therefore institutional capacity is required to prevent this and ensure that funds are released as rapidly as possible to minimise damage.

Unallocated R19.6 billion
There is a need to outline a clear allocation and eligibility framework for the unallocated R19.6 billion set aside for job creation, a key element of phase two, so that provinces know how to acquire more assistance should they need it.

There is need to reconcile the President's Covid-19 relief package announcement of R100 billion for job creation and R20 billion for local government with the adjustment budget.

Finally, there is a need to outline business plans for phase 2 and 3 of managing the fiscus through and beyond the Covid-19 pandemic.

Concluding remarks
FFC said the budget adjustment was inevitable in the context of the devastating COVID-19 pandemic. FFC is concerned about the impact which the repeat reprioritisation of budgets will have on the economy and service delivery. It sees an urgent need to assess the impact of repeat budgetary re-prioritisation on the budget structure and delivery of basic services.

Macro-reorganisation of government is crucial at this time.

Tax policy should prioritise fiscal support because under the current circumstances increasing tax revenue is not a feasible policy option. The Minister has already announced that there will be tax increases over the MTBPS, however, this may not be a feasible policy option, therefore, tax policy should prioritise fiscal support

FFC recommended that provinces and local government must also table plans for revenue enhancement, so that all speres of government submit plans.

Finally, the FFC recommended that Parliament receive reports on how provinces have carried out budget reprioritization bearing in mind the concerns raised about how reprioritisation may affect budget structure and service delivery and the unequal standing of provinces. Reform plans with timelines are needed for each sphere in order to manage the pandemic well. These plans should be made available to Parliament to ensure proper implementation.

Discussion
Ms N Abraham (ANC) appreciated the presentation. She agrees with the Commission’s view about provincial repurposing and reduction as the impact of COVID-19 has not been uniform across the provinces. The allocations should have been according to the size of the various provinces but the impact of COVID-19 speaks a different language altogether. She asked for a repeat of what he said on slide 23. They could all agree that COVID-19 has exposed the giants facing the country—poverty, unemployment and inequality. As important as health is, social development is very important. She asked about the announcement of the pending R100 billion. Why only R95 billion is being mentioned?

Mr D Ryder (DA, Gauteng) referred to slide 17and asked about a move from BBBEE towards more of a means test. Slide 26 shows the budgets which have the biggest cuts and he noted Agriculture has had big cuts. Considering the need for food security, this is concerning. Next Trade and Industry and Science are being hammered by cuts. There needs to be a balanced approach when dealing with lives and livelihoods.

Mr E Njandu (ANC, Western Cape) spoke to the realignment and reprioritisations of provinces and local government. Looking at local government being unable to collect their revenue and that a number of schools were unable to open due to lack of readiness concerned him. Health is a challenge due to PPE access and having capacitated facilities. He noted slide 35 reference to Local Government, Education, and Health and asked if these sectors are able to manage the COVID-19 crisis as we are on Lockdown Level 3 and currently spiking, therefore reprioritisation must bear these sectors in mind in this context.

Mr S Aucamp (DA, Northern Cape) noted that there is a drought in the Northern Cape and he is concerned about the farmers in the agriculture sector. There are people who need help and more support from the government is needed and not mere window-dressing.

Mr I Morolong (ANC) asked how the infrastructure drive led by the President will be financed. Secondly, he commented that the R200 billion loan guarantee scheme does not seem to be working because only a fraction of this has been disbursed by the financial services sector. He asked if all present still thought that this was the correct way to go about protecting small business. He suggested that the Committee receive a presentation on the financial services sector code.

Mr Hill-Lewis noted the raw deal provinces are getting in the adjusted budget. Much is being made about the municipalities having to cover more costs for shelters and additional metro police; however, these costs are relatively small. The provinces have huge additional costs to bear in the provincial health and education systems. Municipalities have been given a big additional allocation and provinces have received zero and in fact, have received huge cuts and now have to reprioritise from elsewhere in their budgets to fund the health and education response. He wondered if this is fair or rational at all and asked FFC to comment.

Mr M Moletsane (EFF, Free State) noted that the FFC welcomed the response in the budget for municipalities as they are key implementers in the response to COVID-19. He asked the FFC for further advice on the proper management of the funding.

Ms D Mahlangu (ANC, Mpumalanga) appreciated that the recommendations on slide 29 addressed concerns faced as a country and not just as a government. It also speaks to Vision 2030, which involves aligning oversight to ensure departments are doing things correctly. On the R20 billion for municipalities, she asked for the FFC's take on why only R15 billion has been released and what happened to the R5 billion. Those in the National Command Centre, including the Auditor General should monitor how the funds are managed as the Committee is sick and tired of having money stolen and then to complain with no effect. If the institutions work together to prevent problems, this would be preferable.

FFC response
Raw deal for provinces
Prof Plaatjies noted that many of the questions speak to reprioritisation and re-alignment and he would ask Deputy Chairperson Michael Sachs to respond. On the raw deal for provinces, the FFC has provided criteria for how the post-COVID-19 budget should be looked at. In an environment of economic and health shocks as well as a lot of uncertainty, there has clearly been a shift towards health. There are questions about where the state will get its revenue and there is debate on how to relook at the state’s responsibilities. The question on the raw deal and if it is fair or rational, depends on how the FFC criteria are viewed and applied.

Means test
There are a number of means tests across the country. Various social support systems have been created and there is a need to look at whether the systems developed are still relevant.

Agriculture and food security
FFC has raised this issue before in light of food security and recognised the need to look at agriculture as a contributor to the economy. Food availability and food security remain a challenge. There is a need to look at how shared value between commercial and emerging farmers can be brought together, especially around blended financing, common approaches and shared value in food security and availability.

Deputy Chairperson Michael Sachs said that this is the first readjustment budget. The decisions on the budget presented to Parliament should not be seen as a final cut. This is a pragmatic attempt at shifting the needs and will be looked at again. Parliament should engage with the details with the view to seeing what else can be shifted later on in the year.

Municipalities
Commissioner Trevor Fowler considered that the key issue being overlooked in large municipalities and metros is that that the equitable share is a small amount of the budget. What is not indicated in the budget is that the impact of loss of revenue happening to national government, will also happen to municipal government. It needs to be looked at in a balanced way, taking that into account

Social services
Using the Eastern Cape as an example, he noted that social services employees are concentrated in the big cities such as PE and Polokwane and not across the province. This highlights the need for re-prioritisation to be done in a way that is equitable and fair. What needs to be taken into account in the future is that once you have given support for a period, you cannot take it away as there will be backlash from society if it is taken away in the future.

Commissioner Elzabe Rockman said that there will be life after the current crisis. Investment and employment are phase two and phase three will be economic reforms. The position of the FFC is the need for firmer timelines and plans on how to take issues forward in phase two and three. On revenue enhancement, she suggested going beyond traditional sources—including rates and taxes as these would not be adequate sources to tap into because of job losses and the state of the economy, people will simply not have that money available. There is a need to be very creative in all spheres of government in planning and out of the box thinking is needed. The effect on land reform and agriculture must be considered seriously in considering its final position on the adjustment budget.

NDP
Commissioner Sikhumbuzo Kholwane spoke to the FFC projection on the NDP 2030 aspirations. He said mitigation needs to start now so these targets can still be met.

Budget cuts
Considered how best to address the spending of various budgets. Even if budgets were not cut, some departments do not exhaust their budgets. Therefore, a real plan about how money is spent is important. He asked for Parliament to look carefully into this so that the use of budgets is carefully monitored so they are not misused.

R100 billion
Mr Rakabe replied that the point of mentioning the R100 billion was to highlight the importance of realigning what the President said and what has manifested in the budget. The R130 billion being reprioritised was announced as being part of the COVID-19 relief interventions, but FFC says they have seen R100 billion. Since they are dealing with a supplementary budget this may explain the shortfall of the funding flowing into the budget.

Infrastructure
Every time there is reprioritisation, conditional grants are hit hard. The President had announced sustainable development infrastructure projects and the head of infrastructure appointment and gradually one will see more infrastructure. Mr Rakabe lost connectivity at this stage.

Prof Plaatjies was asked if he wanted to complete the response but Prof Plaatjies said that he thought the response was sufficient and covered by the presentation.

Ms Kay Brown, FFC CEO, replied why there is not sufficient or additional money made available to address the drought. In responding to the COVID-19 crisis one of the immediate responses was to look at the conditions set for accessing the drought relief funding. Some of that funding has been allocated and used for the COVID-19 response. Going forward, the FFC recommends looking at the time of the MTBPS to see if there are funds to address the drought and other crises in addition to the COVID-19 crisis.

Ms Mahlangu said that she and Chairperson Carim were happy to see Mr Kholwane as a new FFC Commissioner.

Dr Seeraj Mohamed asked if PBO could finish its presentation since there was still time

Mr Y Carim (ANC; KZN, Select Committee Chairperson, noted that the Committee got the gist of the slides but that they may have another five minutes.

PBO continued presentation
Dr Mohamed continued from slide 40. He noted that a lot of the presentation so far has dealt with the reprioritisation. Another item that was in the Finance Minister's speech and in the special budget review was linked to the outlook of the policy and going forward and a move toward a primary surplus by 2023/24 and a cut in expenditure by R230 billion. Food security, access to water and concerns around the poor will become increasingly concerning.

What does it mean if government wants to run a primary surplus by 2023/24?
This means that other than interest payments, government expenditure has to be less than its revenue. It means that government takes more money from the private sector than it puts into the private sector. This means that:
- Government invests less in providing and maintaining infrastructure and essential services.
- Households and businesses spend more to make up for lack of government provision.
- Poorer households especially in rural areas and townships have fewer and lower quality services.
- Businesses end up with higher costs.

Measures to save current and future generations
Additional measures and institutions need to be developed by government to ensure resources are used productively, efficiently and corruption free. He emphasised that future generations will be affected by decisions made now.Some of these concerns are in National Treasury’s SBR. Government’s economic approach to fiscal policy in the structural balance rule (SBR) is outdated. The approach to fiscal policy is based on an outdated, incorrect macroeconomics perspective. It is based on an economic view that: Government should not use fiscal policy to stimulate the economy and that it should run surpluses; Government borrowing crowds out private investment; Government spending cannot improve the economy or reduce unemployment in the medium to long run. This view is based on the unrealistic assumption that the economy rests at full employment equilibrium. This view is not held by most mainstream economists today – they support the use of expansionary fiscal policy in downturns. They recognise that government deficit spending can support medium and longer term growth of GDP that ‘crowds in’ investment and creates jobs reducing the debt to GDP level.

Concluding remarks by the Co-Chairpersons
Mr Carim noted that in this unprecedented, volatile period, there are no easy answers. Views across all political parties need to be modest, after hearing from the experts. Although they engaged with the technical experts, it is the Committee’s job to actually find answers for their report on how they ought to go forward. He noted that Prof Daniel Plaatjies has a good team and welcomed them.

Mr Maswanganyi thanked all the presenters and said that these presentations should not be treated as academic articles. Both presentations raised very critical points, including dealing with corruption, improving governance, land reform for agriculture, security, strengthening the capacity of the state. The presenters also suggest that provinces and all spheres of government be invited to present on their new revenue reprioritisation and this could be done through SALGA. SALGA should also present on the revenue enhancement and expenditure plans. He agreed with the presenters in saying this has to be done as the Committee has seen the figures on revenue reduction from SARS, right down to municipalities. If the Committee does not conduct oversight, surely the R20 billion set aside for municipalities will be a drop in the ocean as municipalities are already facing financial difficulties. It is also up to municipalities to come and present about their expenditure reprioritisation as well as their revenue enhancement plans. Coupled to this, provinces and MECs will need to be met with to deal with their budgets.

State-owned enterprises (SOE) reform plans need to be addressed. The Standing Committee on Finance is empowered to receive a presentation either by DPE or a combination of DPE and National Treasury on SOE reform plans. He said that the meeting must be concluded with a clear way forward.

Another issued raised often is that in most cases, presentations from the FFC in particular, it seems as if Treasury does not take them seriously. FFC derives its existence from the Constitution and is not a by-the-way structure. FFC has a life of its own and its recommendations need to be taken very seriously. The concrete recommendations made by both presentations will be taken forward by the Finance Committees of Parliament. The critical issues from the presentations would be identified and a plan of action made. As the issues are of high import, all parties need to work together to implement change.

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