The Financial and Fiscal Commission (FFC) presented to a Joint Committee on its Division of Revenue submission for the 2021/2022 year in a virtual meeting. The presentation focused on South Africa’s inter-governmental fiscal system and the context of social services; economic and social development in the context of Covid-19; sustainable financing of South Africa’s public health care system and the National Health Insurance (NHI); and vulnerability and access to quality and inclusive social services.
The ensuing discussion by the Committees entailed many topics. These included: zero-based budgeting; Division of Revenue Act (DORA); maternal mortalities; education on issues of pregnancy; substance abuse; National Health Insurance (NHI); and Early Childhood Development (ECD) challenges. In this regard, it was noted, stable and supportive families contribute to social cohesion and are associated with high levels of productivity and low levels of crime and substance abuse.
Other topics raised by Members included: investment, and resourcing; focus on education foundations; equality of education; adoption of a localised product value chain; net exports and imports; dangers of globalisation and standardisation; and vulnerability of the neo-liberal capital health care system.
The FFC answered questions on the R500 billion stimulus package; the role of the bank in private sector support; nationalisation of the South African Reserve Bank (SARB); efficient spending of budgets; Covid-19-related effects and interventions; economic reform and structural change; sovereign wealth fund; and unemployment and poverty issues
From the provinces, apologies were noted from the Northern Cape, Mpumalanga, Western Cape, and Eastern Cape.
Of the Members, apologies were noted for Mr Y Carrim (ANC, KwaZulu-Natal), and Ms E Ntlangwini (EFF).
Financial and Fiscal Commission (FFC) briefing on the 2021/22 Division of Revenue
Prof Daniel Plaatjies, Chairperson, FFC, introduced the presentation.
Mr Eddie Rakabe, Program Manager: Fiscal Policy Unit, FFC, looked at South Africa’s inter-governmental fiscal system, and the context of social services.
Mr Chen Tseng, Research Specialist, FFC, presented on the economic and social development in the context of Covid-19, sustainable financing of South Africa’s public health care system, and the National Health Insurance (NHI).
Ms Sasha Peters, Program Manager: National Budget Analysis Unit, FFC, outlined the vulnerability, access to quality, and inclusive social services.
The theme of the 2020/21 submission is “Sustainable Financing of Social and Economic Infrastructure and Services”. The submission focuses on the challenges confronting the delivery of social services in South Africa, against the backdrop of economic and health crises. The global and local economic growth outlook is grim. Unprecedented fiscal and monetary policy interventions are required to boost the South African economy to its pre-Covid-19 growth trajectory.
Deficit reduction and debt stabilisation targets are becoming increasingly elusive, leaving South Africa with limited fiscal space. Public expenditure is a crucial fiscal policy instrument to influence economic growth. In South Africa, empirical evidence shows the causal relationship runs from economic growth to government expenditure. This implies economic growth causes government expenditure. Therefore, from a policy perspective the focus must be on government creating a conducive environment for growth.
Poverty levels are still high. The effect of Covid-19 will leave many people without jobs, among other repercussions. Government will have to provide social interventions and a conducive environment for the private sector to grow, for people to be employed, or to receive social protection.
The submission on South Africa’s intergovernmental fiscal system, in the context of social services, assesses factors which affect effective functioning of Inter-governmental Fiscal Relations (IGFR) for social services. The emphasis is on governance, delivery, and funding challenges. IGFR arrangements for social services are fraught with multiple challenges. It causes intergovernmental fiscal tensions, sub-optimal delivery, and development outcomes. There is a lack of clarity on the division of responsibilities for concurrent functions. This creates tensions in the delivery of social services. Intergovernmental relations (IGR) structures foster co-ordination.
The absence of standard methodology to estimate provincial expenditure needs exacerbate perceptions of fiscal imbalance and budget gaming. A lack of norms and standards leads to variations in allocations and service quality across provinces. It causes intergovernmental fiscal disputes. There is insufficient credible data available to enable systematic and holistic evaluation of social services performance. The current provincial equitable share (PES) formula is relatively allocative inefficient – it could be improved significantly by incorporating certain aspects of the costed norms model.
The National Health and Education sector departments, including National Treasury and the Department of Co-operative Governance and Traditional Affairs (COGTA), are responsible for making IGR operational. It must invest in financial and human resource capacity to conduct IGR conscientiously, and emphasise the values of trust and co-operative governance.
The submission on economic and social development in the context of Covid-19 stimulates a new discourse for a cogent recovery plan to invigorate South Africa’s development. It focuses on three aspects: Socio-economic context of Covid-19; Financial and fiscal context; and Food security, agricultural economy and local development.
The Covid-19 impact is anticipated to cause the most significant downturn in South Africa’s economic performance from 1960-2020. There is a structural decay in the long-run gross domestic product (GDP) growth of South Africa. The impact of Covid-19 had a devastating shock on SA’s economy and the pandemic highlighted stark inequalities which persist. Two main roots underlie persistently high levels of joblessness and inequality in South Africa: Apartheid’s economic legacy; and Dependence on commodity-based industries.
South Africa’s response to this crisis can be to try and return to business as usual (which no longer exists), or to grasp the reality and opportunity to leverage the crisis and effect structural change in the economy. Headline inflation was at 3% because of the sharp decline in economic activities and transactions. Core inflation was at 3.9%. South Africa has 96 841 000 hectares (ha) of agricultural land, which is 79.83% of its total land area. Of this land, only 1.66% (or 1 599 808ha) is under irrigation. This suggests the sector does not realise its full potential for economic growth and productivity. South Africa’s high levels of irradiation also offer an enormous opportunity for renewable energy for industrial growth in rural areas.
The FFC made various recommendations. The Minister of Finance must develop (and execute) a clear, coherent, and comprehensive macroeconomic framework. It must be in line with the President’s economic and social support response package to Covid-19. The Minister must consider the position taken in “Towards an Economic Strategy for South Africa” to strengthen the continuity, consistency, and credibility, of the economic and fiscal stance.
These policy positions must be clearly represented in the 2021/22 Appropriation Bill and Division of Revenue Bill for implementation. A fundamental structural transformation of the economy is inevitable. Therefore, the Ministers of Finance, of Economic Development, and Trade and Industry, and Labour must jointly address the matter. It must address the economic barriers, social inequality, and societal polarisation, by adopting a localised product value chain approach.
With the right infrastructure and financial support from the State, emerging farmers can be catalysts for local economic development and growth. Food security is an added benefit in facing the Covid-19 crisis. Hence, the Minister of Finance and the Minister of COGTA must use reprioritised, consolidated funds, to establish an indirect grant and task team for basic services and local economic development. The reprioritisation must be clearly stated in the Money Bills over the 2021 Medium Term Expenditure Framework (MTEF).
The submission on sustainable financing of South Africa’s public health care system analyses the pricing of three major health care packages. These are the Primary Health Care (PHC) package, Prescribed Minimum Benefits (PMBs), and the Proposed Demand-Based (Pareto) health care package.
South Africa’s health system is among the most vulnerable, given the extreme socio-economic inequality and two-tiered health care system. The cost analysis found the current PHC package covers less than a third of the health care services for one patient making one visit per year. It also focuses on non-care services, whereas in actual care the package’s aim is to stabilise patients (including emergencies) and manage minor ailments. Most cases which require more sophisticated services need to be conducted at hospitals through the referral system. This issue is pertinent during Covid-19 pandemic, as many of these small-scale PHC clinics are not equipped or capacitated enough.
A cost-effective health care package can be derived through a simple demand-based costing approach. With better and more reliable costing and output data, more efficient packages will be possible.
The FFC made various recommendations. The Ministers of Health and Finance must prioritise the development of an integrated national information system of patient and doctor registries. It must do this with real-time data, to inform health care decisions, using the demand-based costing methodology. Funding this data system must be pronounced in the Division of Revenue Bill, and Appropriation Bill. The Minister of Health must re-examine the prescribed PHC package based on people’s needs, refocusing from informing, promoting, identifying, facilitating, and educating activities to providing health care services.
The Ministers of Health and Finance must ensure an enabling policy and legislative framework, aligned among the spheres of government, is put in place with regard to setting norms and standards. It must be enforced with proper oversight by the established technical committees. The Minister of Health must eradicate the inefficiencies of wastages, corruption, and leakages, which result from the disparity of the two-tiered health care system.
The submission on access to quality and inclusive social services focused on family and community welfare services, such as Early Childhood Development (ECD), and inclusive education. Stable and supportive families contribute to social cohesion and are associated with high levels of productivity and low levels of crime and substance abuse. Government provides a range of services to families and communities. Department of Social Development (DSD) is custodian of government’s policy and programme of action when it comes to families. A key challenge is the disconnection which exists between policy and practice. Key ECD findings were: Stronger prioritisation required; Need for greater and better targeted funding; Lack of up-to-date data to inform decision making; and Training ECD teachers are necessary.
Key inclusive education findings were: lack of accurate assessment of need and data on inclusive education; incomplete policy process and emphasis on special needs education; and capacitating teachers for inclusive education.
The FFC made various recommendations. The DSD must develop a three-year progressive realisation sector plan to establish interventions which proactively strengthen and stabilise at-risk families and communities. The DSD must conduct a nation-wide audit and mapping of ECD services. The DSD must lead the finalisation of legislation for ECD, together with a fully costed, time-bound implementation plan. Government must strengthen funding for ECD. Particular priority must be given to funding all non-profit, non-centre based ECD programmes serving quintiles 1 to 3. Government must ensure further targeted support to the poorest ECD programmes, focusing on infrastructure upgrades, subsidies, and funding for basic early education equipment. Alongside finalising legislation to underpin the roll-out of inclusive education, the Department of Basic Education (DBE) must take the lead in developing a public sector detailed, time-bound, and costed implementation plan. As a matter of priority, the DBE must determine the extent of learners with special educational needs. The DBE mustdevelop a holistic funding framework to ensure a uniform approach to funding learners with special educational needs, irrespective of the type of school the learner attends.
For the FFC’s next submission for 2022/23, it will provide a comprehensive assessment of the socio-economic effects of the coronavirus pandemic, under the theme: “The effects of Covid-19 and the changing architecture of subnational government financing in South Africa”.
Chairperson Buthelezi said Chairperson Mahlangu had connectivity issues and asked Mr Mkiva to co-chair the meeting in her absence.
Acting Chairperson Mkiva asked Members to be precise in questions.
Mr D Ryder (DA, Gauteng) asked if a hardcopy of the submission for the Division of Revenue 2021/2022 could be made available. He likes to cross-reference and make notes in the margins, which he finds quite difficult to do electronically. The book is quite popular and he spent quite a lot of time working through it.
He asked how zero-based budgeting is considered, and how it affects the FFC’s deliberations on the Division of Revenue Amendment (DORA). Specifically, he asked if DORA was taken into account. In going back and rethinking every project, he asked what the recommendations are regarding zero-based budgeting, and he asked for some background on this.
Ms D Peters (ANC) referred to the slide which represented maternal mortalities. In 1994, in his very first statement to Parliament as the first Black and democratically-elected president, Former President Nelson Mandela declared free healthcare for pregnant women. Thereafter there was a process the Department of Health (DOH) was involved in, which related to an inquiry into maternal deaths. It is important at times, to zoom deeper into this issue. When looking at the percentage presented by the FFC, it showed there are still challenges in the North West, Mpumalanga, and Limpopo.
Regarding maternal deaths, it was actually more pronounced in these provinces when it was a national problem. It is important to look at how the areas focusing on the issue can be better resourced. It is an indictment to see women dying in the process of giving birth. In a country like South Africa, there must not be a situation where babies and mothers are dying. There is a need to create an environment where people can enjoy pregnancy and have live babies from the pregnancy. Pregnancy education for mothers in rural areas and informal settlements in particular, is also important. It has been a long time since the DOH was involved in pregnancy weeks and health promotions related to pregnancy. There was a serious challenge in the Northern Cape called foetal alcohol syndrome, which related to how women used alcohol during pregnancy.
She referred to slide 15 the FFC’s presentation. 26 years into South Africa’s democracy, the FFC is still saying there is a lack of clarity on the division of responsibility for concurrent functions. She asked what should be done if these particular challenges are still present.
Regarding health data shortages, the DOH and StatsSA must be able to answer for this. By now there must be systems in place. Around 2003, there were processes on patient registers which people were told would actually enhance data collection. There was also a non-governmental organisation (NGO) called Health Systems Trust which could source this particular information. Data is possibly a problem because of lack of collection of information at source. The question is if the FFC is of the view NHI implementation is possible and still on track.
On slide 44 the FFC spoke about ECD. There must be more focus on this aspect, especially if it is said, less than 40% of ECD practitioners are trained for the responsibility carried. The ECD practitioners deal with children at very elementary and formative stages, below the age of six years old. Investment in this area i very important if the Committees and FFC want to minimise challenges for learners who enter basic education but do not get through to matric. Also for those learners who end up dropping out and become a problem for society. Sometimes there are other problems, perhaps health-related, which could be picked up in the ECD environment. The DOH, Department of Basic Education, and DSD, are the key social cluster departments. It must work together to make sure the interests and issues related to the rights of children are looked at during this particular stage.
ECD is the most important education phase and it must be made sure it is properly resourced, the practitioners are properly trained, and there is access to health interventions to examine and see the children are attended to. The DOH had a programme called Integrated Management of Childhood Illnesses, which could pick up those particular challenges in the ECD environment. Children who had not gone through ECD were a problem.
Mr M Moletsane (EFF, Free State) commented on slide 28. It is important, and he agreed, the Ministers need to jointly adopt a localised product value chain approach. This is to permit procurement of goods made in South Africa, stimulate the domestic economy, and help with job creation. The ECD plays an important role in the lives of children, and it is important for educators teaching in ECD to be well motivated. There is an issue of parity of salaries between provinces which must be looked into. He recommended the issue be looked into, and there needs to be a recommended minimum wage for all provinces, especially those qualified educators.
Mr M Cwaile (ANC, North West Provincial Legislature) focused on slide 40. Cleary the vulnerability of the neo-liberal capital system, which is dominant and shapes the health care system, is exposed by Covid-19. He agreed with the FFC on the need for fundamental transformation. A system is needed which expands the production of society. The constraints of private ownership must be removed. He hoped the amendments of Section 25 of the Constitution will get closer to doing this. Production must be expanded to meet the needs of humanity, which will then take South Africa to a higher stage of development.
However, there is still a capacity panic. Voluntary military conscription might need to be considered. This might positively impact the efforts to increase the capacity of South Africans to become active role players in the economy. This includes those on the fringe of the periphery, of the mainstream economy.
Regarding recommendation two under Chapter Four of the presentation, the review of PHC packages is really needed. It must be in the context of a need to review the national healthcare system. The intention must be to increase the types of services, and expand such services to communities. Amongst other things, it must seek to improve the preventative interventions because it will reduce the burden on the treatment, rehabilitation, and other tertiary services. For example, there is a condition called hydrocephalous. It results in children with big heads and small limbs. At the level of co-ordination, at national, provincial, and district offices, there is a need for many people at the coalface of service delivery. There are serious shortages. This requires a deliberate action, whereby Members and the FFC work on reviewing the organograms of the DOH.
When reviewing the PHC, it must help to make sure traditional healers become a point of entry into the healthcare system in view of the NHI. The two main types of economies of scale suggest both external and internal factors are depended on. The target for achievement must be the cost advantages the enterprise obtained due to the scale of operation with cost-per-unit output decreasing and an increase in scale.
The problems of health are global and will not be resolved quickly and overnight. It will remain permanent if there is no serious and radical transformation. The government is just not able to do this. At the provincial level, there are no plans showing any form of integration. The mandate of the FFC according to Act 9 of 1998, in response to section 214(1) of the Constitution, enabled the establishment of the FFC. Its vision was clear. The FFC must provide influential advice for equitable, efficient, and sustainable IGFR submissions.
At the provincial level there is not even an integrated plan, let alone at the level of municipalities. At the provincial level it is called an integrated development plan. This is not true upon studying it. Rather, it is the municipal development plan because it does not even include other role players in the form of departments. This is why the President, Mr Cyril Ramaphosa, made efforts to come to the intent of IGFR by launching the district model. The question is what does this mean. Where a hospital had to be built, the municipality could assist with its capacity and resources to bring about bulk services. The departments are incurring costs because there is no one integrating efforts when this is the mandate of the FFC.
In September 2019, at the North West Provincial Legislature, its Members interacted with the FFC. Members raised many issues bringing about real transformation. If the mandate of the FFC is just to make sure it sheds costs amongst all of those who were to deliver services, its recommendations are still far from this. This is why it submitted, continued input must be made to enable FFC to make real influential advice to positively impact governmental efforts to change people’s lives. Nothing will be achieved with all of the propositions which did not bring radical change.
Mr D Joseph (DA) said Mr Rakabe made reference to governance, and asked if the FFC is following the R500 billion stimulus package. He asked what the role of the bank is in the private sector. He said this regarding supporting the government’s view on the intervention, which must be supported, given the Covid-19 crises. He asked if the FFC is scrutinising, following, and monitoring what the R500 billion package is bringing out to the people.
Regarding slide 10, he supported Ms Peters on quality healthcare where it was mentioned the infant mortality rate is bad. He asked what type of resources and needs are referred to, as it was said more resources are needed.
He said ECD takes place both outside and inside of schools. Some people were paid during Covid-19. These are the ECDs inside of government. However, up until today, those ECDs outside of the government education space and those not registered did not earn a cent because it could not afford to open. There is a discrepancy which is not fair towards ECD.
He referred to slide 23 of Chapter Three, where Mr Tseng raised a point about a recovery plan to examine the market, localise the production, and food security – all of which are important. He asked if there is a task team in government which would deal with this, or if it is left up to each department. He is worried every department will just go back to business as usual. South Africa needs to lift itself above the crisis, and task teams in government must monitor and ensure concentration on the recovery plan.
He continued on ECD and asked Ms Peters about substance abuse. Justice E Cameron recently said substance abusers, particularly youngsters in school, should not go to jail. 75% of the people in jail are there because of substance abuse. South Africa needs to look at if putting people in jail because of substance abuse is the right system in place. This money could be spent on the social areas where the needs and problems in communities are.
Regarding the current ECD funding, he asked what the FFC is proposing government must do to get the foundation right for the future of South Africa. ECD is part of this. R8 billion was thrown to higher education, which is fine in principle. However, if the entry level and foundation is not right then all of the levels up until higher education will not succeed 100%.
Mr O Mathafa (ANC) referred to slide 5 of the presentation, where the FFC argues for unprecedented fiscal and monetary policy interventions. There was an intervention from the South African Reserve Bank and National Treasury. He asked if the FFC thinks there is still enough scope for unprecedented policy interventions. If yes, he asked how this intervention would look.
Regarding slide 25, there were numerous calls for economic reform and structural changes. The FFC joined the chorus in calling for such structural adjustments in the economy. He asked what specifics the FFC would recommend for these structural changes. He also asked how it must look and where it can be effected. Given the impact Covid-19 had on health resources, he asked if the FFC thinks the NHI is impossible. He asked if it is still affordable, given the new recommended approach of zero-based budgeting. He also asked if it is still possible for South Africa to implement this.
Mr X Qayiso (ANC) noted apologies from Ms M Dikgale (ANC) and Mr Z Mlenzana (ANC). In the presentation he heard the FFC acknowledge unemployment will become an issue in the future. He was hesitant to say this would be post-Covid-19, because he is unsure when Covid-19 is going to end. However, it was obvious Covid-19 will have long-term effects.
He asked if there are any long-term measures the FFC recommends, and thinks must be applied in the interim, in advance of the predicted job losses. He asked if there is anything specific the FFC wants to suggest in counteracting the effects of job losses moving forward. The funding model for local government was proposed by the FFC around 2001. It was then put aside – not implemented or rejected. The FFC said the funding model seemed to be something achievable, and would come up with positive results. The FFC said it still believes it must be elevated. It is important for the FFC to share this model with the Committee, so the Committee can familiarise itself with it, and pick up support for such model if the FFC thinks it is a workable method.
He discussed the issue of the availability of data, health, education, and reflection on some bad outcomes. In the context of what the President said during the State of the Nation Address regarding the seven priorities, health and education was enumerated as key priorities which must be spoken about.
The FFC said there are insufficiencies in health and education, such as ECD. Regarding ECD, Members correctly said the area needs a lot attention. The problem all along, when it came to the outcome in education, was the focus on Grade 12 results without necessarily looking at the backbone of what actually informed this outcome.
Moving forward to the Medium-Term Budget Policy Statement (MTBPS), the funding for ECD must be looked upon and engaged with by the Ministry and National Treasury, so it forms part of the MTBPS to come. On developing comprehensive microeconomic policy, the FFC made reference to the issue of government’s document on economic recovery. A developmental State is now spoken of. He asked why reference was not made to the Economic Reconstruction, Growth and Transformation document.
He referred to his principal’s mandate and believed there are a lot of issues around this. However, one would prefer a reference to economic growth and transformation in the context thereof. The recommendations in Chapter Three, Four, and Six, really make a lot of sense and, as a Committee, it is thought the recommendations must be considered – especially around the issue of translating policy into legislation by the DBE.
He suggested there be some engagement with the Portfolio Committee on Education and Portfolio Committee on Health on all of these recommendations, which were cut across the committees.
Mr Cwaile said the FFC was beginning to have a clearer view of what the challenges are composed of. The FFC seems to have a reorientated perspective because of its submission. There is a need to logically conclude the need for fundamental transformation, and its assertion regarding supporting local production. Covid-19 showed how globalisation is easily able to collapse when borders are closed and villages of the globe begin rat races to secure goods it needs for its communities. Meanwhile, the difficulty to share the goods forces nations to engage in localised production. One cannot do much about what is owned by another country. He agreed, globalisation is governance without government and no government can force a particular company in another country to avail resources which would save the lives of its nation. Local production must upscale at necessary speed.
Mr I Majake (EFF, Free State Provincial Legislature) assumed the FFC would converse its process, views, and recommendations to the provinces as and when time and space allowed. On this basis, the provinces will engage with the FFC at a provincial level. Members and the FFC are in a national space, one is confined to national issue. The presentation started by indicating unprecedented fiscal and monetary policy interventions. In a nutshell it showed ballooning made it difficult to reduce debt and to deal with growing expenditure. All of these issues point towards neo-liberal policies. Everyone is at a juncture where it can see neo-liberal policies cannot work, and at some point the current neo-liberal policies need to be dismantled. In attempting to do so, there are suggestions to minimise interactions with the FFC when it comes to provinces. The question of how equitable the equitable share is will continue to be asked, until Members are convinced by and understand the formula used for equitable share. This formula is still grappled with, but going forward all Members will come to terms with this and understand how equitable the equitable share is.
Regarding structural adjustment and changes, he proposed it is about time a corner is turned by creating a sovereign wealth fund. The R500 billion stimulus package showed the country had a capacity to raise funds. It is the right time for the FFC to take into cognisance there is a need to create a sovereign wealth fund.
It was also about time to nationalise the SARB. There will always be advocation for mechanisms which deal with issues of illicit financial flows. This is where South Africa lost a lot of money in a manner not acceptable. The issue of illicit financial flows must be dealt with head-on this time around.
Regarding the distribution of fiscals, he advocates for a distribution where 40% is at national level and 60% at local level. Of this 60% at local level, a minimum of 50% of the funds allocated to local government must be used solely for the delivery of services. It can even be ring-fenced. Lastly, the FFC must recognise the reality. It is about time government created a State Bank for issues confronting South Africans to be dealt with.
He said he is sure, going forward, the FFC can be expected to come to the provinces to engage on the issues of the provinces. It is preferred for the presentation to be brought to the provincial level so provinces can engage with the FFC in a terrain it better understands.
Acting Chairperson Mkiva asked if the FFC thinks ECDs in South Africa must be compulsory and if it can no longer be postponed. People were in the situation where their children did not have access to very important primary education. Further, this goes against the preamble of the country, everyone is equal before the law, and particularly prevents the right to education from being available to all children.
Given the importance of the ECD centres, this cannot be postponed any further. There must be a way to make sure ECD is made compulsory throughout the whole country, particularly in the rural communities of South Africa. ECD must be standardised. There must be uniformity. Given the fact ECD centres are located in the DSD, he asked how it can be ensured there is a working relationship between the DSD, DBE, and Department of Culture. He believes education and culture are two sides of the same coin. If children can be educated about their African culture at this level, it will ensure children are steered in the right direction to know their heritage and history.
The FFC spoke about the quality of education across the length and breadth of South Africa. It must be found in all of the respective provinces. He asked if the FFC thinks there are gaps in certain provinces insofar as the quality of education dispensed for consumption by our children. He asked if the FFC Members applied their minds to the relevance and updated-ness of the education system in its current form. He asked if there is a greater need to transform the education system as an instrument of social transformation in itself, and not deal with the issue of quality, but rather the issue of standard of education. He asked if South Africa’s education is fit for the purpose of a developmental State.
Chairperson Buthelezi said there was a lot of talk about structural changes needed in the economy. He argued, the biggest structural change the economy needs is to correct the skewed ownership of the economy. It is obvious the skewed ownership of the economy went along racial lines as the majority of South Africans found themselves in the margins of the economy. This results in socio-economic outcomes which are very negative and which manifests itself in high rates of unemployment, poverty, and low economic growth.
Mr S Du Toit (FF+, North West) raised a point of order. He thought Chairperson Buthelezi was misleading the House of Parliament. The reason why South Africa is currently sitting with a huge percentage of joblessness is not as a result of the economy as such, but as a result of the corruption by the governing party, and the way in which it deals with funds.
Chairperson Buthelezi said all Members are given a chance to talk. He asked to be respected when it is his opportunity to speak. Mr Du Toit must not interrupt a Member when speaking – this is very disrespectful to say the least. It does not mean everyone agrees with what other Members say, but Members respect each other and allow one another the opportunity to talk.
The biggest structural intervention the economy needs is related to skewed ownership of the economy. He does not know what is controversial about this, as it is documented. It needs to be done. Perhaps it can be disagreed on how to achieve this, but the ownership of the economy is very inequitable. He said he wants to hear what the FFC has to say on this.
The macroeconomic indicators and unemployment speaks to inclusive economic growth. He does not think he heard why this is not being achieved. The story on inclusive growth is very thin. More time must be spent on how to achieve this. When dealing with this, the FFC will look at various sectors. Sectors which have a greater multiplying effect must be identified and unpacked – especially where it relates to inclusive growth and employment. At the end of the day, better revenues and employment figures cannot be achieved without inclusive economic growth. More discussion and research on this is needed. He asked what the FFC has to say on this.
When looking at the aggregate demand curve and equation, the FFC was asking how to impact on consumption for it to go up, increase government investment, and how to get exports up while at the same time getting imports down. The idea is the net export figure can go up and impact on the aggregate demand equation. When talking about economic growth being needed, there is too much focus on investment which is not being received.
Regarding other variables such as consumption, which is more than 65% of the aggregate demand curve, not much is said about how to increase this. He said he would like to hear the FFC talking more into the type of interventions South Africa needs to get. A lot was said about costing and pricing health care packages. When it comes to this, health, trade and industry, and finance, are all key players. More needs to take place.
He asked how the FFC’s budget is used to promote local production, inclusivity, and revive the towns which are dying. South Africa imported so many products which can be produced in the country, including medicines used for health. When it comes to Covid-19, it becomes very clear things can be produced in the country and are being imported. This has a negative impact because importing means exporting jobs, and the growth of the economy. As a start, insofar as a commodity is concerned, the budget must be used to identify a small town to consider how to use the budget to try and revive local production.
The efficient spending of the health budget must be looked at. Perhaps one day the education and other budgets can be talked to. There is a story and work which needs to be done here. He said he always found it a little disturbing when people think more money will be the panacea of the problem. There is a question about how to get maximum impact from the budget given out. He sometimes argues, even if some of the budget dealt with by the Committees is doubled, the Committee will still not be able to get the impact it wants. There is a bigger problem than money, which is only part of the problem. However, the biggest part of the problem is spending the budget efficiently.
Mr Cwaile said through ever increasing openness and transparency, South Africa can defeat corruption and wastages. All processes of procurement must be done under camera through uninterrupted video recording. This can be made available for litigations, promotion of access to information, and legislative policy imperatives. Financial delegations need to be expanded to individual institutions or subregions to facilitate people’s access to and share on state capital. The funding model must be able to be influenced by individual provinces modernisation need, development gaps and backlogs, population numbers and even strata/class. Many provinces may be able to generate revenue and sustain themselves. This is especially at the level of municipalities. Devolution of responsibilities, and other related mandates such as influx of migrants and refugees –
Corruption is not an ANC creation but is a societal problem. The theory of political or public participation teaches one that people who become Members and leaders of political parties, are drawn from the communities of societies. Such political parties seek to serve. The resources of the country are not only State capital, as South Africa also has social capital, private capital, and sectoral capital. Such capital exchanges hands not only in an orderly manner, but also in a corrupt way and skewed amongst certain societal groupings, or even varying races. Therefore, corruption did not only happen in State apparatus but also outside of the State itself, and amongst members of communities of the nation.
Acting Chairperson Mkiva said he also found it very odd, someone raised a finger when raising such an important point, which is the most fundamental question in South Africa, and which places South Africa in all of the problems faced as a country. The fact is, there is a very skewed ownership of the means and factors of production in the country. Unless people come to realise and accept this fact, everyone can agree it was something which needs to be addressed to move forward as a country.
Professor Plaatjies thought the nature and extent of the conversation actually raises a number of contesting issues the FFC found in current South African society discourse. If this is through the economy, public finances, taxation, service delivery, or ownership, it is quite an involved conversation. The FFC got to a point where it started thinking about how to do things differently in terms of its engagement with Parliament and its Committees. This was just the start of how the FFC would reply. The FFC has no issues with the NHI policy issued. In fact, the FFC is of the view it needs to be fast tracked. If NHI policy is affordable, can only be determined once the FFC knows the costing and pricing of it. This is an issue consistently raised with the Committees. The FFC cannot provide any firm views until it knows the following: it must know costing structures, pricing, proposals on how it will be financed through the internal tax system of the country, pooling resources between public and private, non-profit health financing, out of pocket spending, and how this regime will work. There are some structural issues which must be resolved. Some of it is related to legislation and policy questions, service delivery network regarding where certain responsibilities will be located, and how the purchaser-provider issues relate to the Act. It will be dealt with. However, the FFC fully supports the NHI scheme and thinks Covid-19 shows it needs to be fast tracked as quick as possible.
The FFC did not comment on political parties economic policies at all. It deals with matters in the State sector and how this influences the configuration of the macroeconomic and fiscal framework, service delivery within the country, the issue around public goods, and the quality and value of services. If the FFC is asked to comment in a different forum, it will probably speak to it, but can only do so in its individual capacity. This refers particularly to the question around why the FFC did not respond to the Economic Reconstruction, Growth and Transformation policy document of the ANC.
On the issue raised about the funding of local government and equitable share allocation, Professor said it is not about the equitable share allocation or formula, but rather about the division of revenue. The division of revenue between national, provincial, and constitutional obligations, the responsibility of municipalities in terms of constitutional law, and municipal legislation, are the key issues which need to be looked at. The real price of services will never be known if the inputs which need to be delivered into the services are never costed.
One of the big problems in South African society is, provinces, departments, and municipalities, will say it is underfunded. However, the key question which consistently needs to be asked is what the costs and prices of its mandate, functions, growth, responsibility, and services are. On the basis of this it will be known if the equitable shares are inequitable. It will also show if the division of revenue is unfair in terms of the cut of the cake between the national, provincial, and municipal responsibilities of the country.
Linked to this is the issue around municipalities. Municipalities are essentially about infrastructure and bulk service delivery. It is often forgotten, the best rules, regulations, and governance systems can be put in place. A municipality’s constitutional responsibilities are to deliver bulk services, provide clean drinkable water to its citizens, and have a clear reticulation system when it comes to water and sanitation, electricity and road. All other things provided by the municipality are auxiliary services. Due to this, municipalities need to function in two ways: on the one hand it must provide goods and bulk services to its citizens for free. On the other hand it needs to sell those services to its citizens. There is a dilemma in the municipal environment, where municipalities need to deliver services to its citizens and many of its citizens find themselves in absolute poverty.
When it comes to Parliament, municipalities are continuously bashed. However, one forgot to ask those questions and look at the comprehensive responsibilities linked to infrastructure. There was old infrastructure in most municipalities. Most infrastructure is falling apart. The question of maintenance was raised. The issue is if there is enough funds for maintenance. This is not a municipal problem. It is an old historic problem. There was municipal debt and municipalities were spending funds badly. Municipalities were not asked how much of the debt is from before 1994. In the municipal arena there was an amalgamation of municipalities over election cycle. A political decision is made which trumps the constitutional responsibility of a municipality, economic decisions, fiscal viability, tax base of the municipality, and if the municipality can afford to deliver services. There was thus old and new infrastructure which needed to be looked at.
The other question raised is around zero-based budgeting. The Professor did not know how to reply to the Finance Minister Tito Mboweni, other than to say zero-based budgeting is not going to work. Data, time, and resourcing centres are needed. These marginal issues within the zero-based budgeting approach will normally be addressed. The zero-based budgeting approach was tried in the 1990s and it was abandoned. There was also the issue around the Wage Bill. Most of the National Treasury’s spending went into the Wage Bill, debt service costs, and social transfers. So, if zero-based budgeting is done, it will only affect 2-3% of the budget. Thus, zero-based budgeting in itself will not work.
On the issue around functions and weaknesses, he said South Africa has a weak decentralisation system – especially when it comes to provinces. National is responsible for policy and legislation, as well as finance. This means there is a continuous to-and-fro to resolve the issue around mandate functions, and roles and responsibilities.
The FFC did not do a study on the relevance, update of education, and its ability to access a quality standard. However, clearly part of the meeting is helping the FFC to address some of these issues.
Prof Michael Sachs, Deputy Chairperson, FFC, focused on two questions in particular which related to the macroeconomy. The first question is if there is still scope for unprecedented fiscal and monetary interventions. When looking at government’s response to the Covid-19 crisis, it needs to be noted there are three economies which have the largest budget deficit for this year:
The United States of America has the largest budget deficit. It is estimated at about 25% of GDP; Brazil has about 14-15% of GDP; and South Africa has 15% of GDP. This year, South Africa had one of the biggest deficits in the world among major economies. When looking at any country in the world, South Africa’s budget deficit is much bigger than anyone else’s. Size matters in this space, because this should be the real starting point when asking how big the stimulus is.
This year, South Africa had to borrow R700 billion, which is more than national savings. There is a very big question mark about if South Africa will be able to raise the R700 billion on savings.
However, even given this reality, there were two criticisms which could be raised with the stimulus.
The first criticism is if it is ambitious enough. The question is if South Africa could have added another few 10 billion rands to expenditure to focus on the Covid-19 response. In the FFCs view, South Africa could have been more ambitious. For instance, South Africa now has a loan with the International Monetary Fund (IMF) which amounts to about R75 billion. If South Africa ring-fenced the expenditure for Covid-19 response and separated it out from the rest of the budget by making it clear it was for the Covid-19 response, South Africa could have allocated the R75 billion from the IMF to additional expenditure. In his opinion, there was an overreliance on reprioritisation and government could have gone further to spend a bit more.
The second criticism is, it was fine to talk about adding more to spending, but the truth is, looking at the Covid-19 grant introduced, or Unemployment Insurance Fund (UIF) temporary employee scheme, and Guarantee Fund which was set up through the banking system, none of these delivered on the promise one would have liked it to deliver on. Implementing the stimulus package, in his view, is a bigger problem than the volume of resources allocated to the stimulus package. This is a lesson South Africa must learn. The lesson is, when intervening, it is much easier to use existing channels than it is to try and create new channels of intervention. This is because, whenever creating new channels of intervention, there is a tendency to underestimate how long it takes for the channels to get up and running, and to work properly. A new guarantee scheme or grant was set up, and it was thought it will have an impact, but what actually had direct and immediate impact were the things one knew were already working – such as the Child Support or Old Age grants which were already there.
On the question of quantitative easing, he thinks South Africa was constrained in the amount of quantitative easing it could do. The reason for this constraint has a lot to do with South Africa’s fiscal position. Behind the ability of central banks to do quantitative easing in the United States of America (USA), United Kingdom (UK), or Japan, is private investors who have confidence the assets of government are safe. So when the USA or UK announced quantitative easing, market participants reinforced its policy intervention. Therefore, state action was complimented by the action of private investors.
In South Africa there was a question mark around if our assets are safe. The reason for this question mark is because the debt level in South Africa is on a trajectory of acceleration. There was not really a clear and credible plan to arrest the trajectory of debt. It is not the debt level which was too high. It is not about the level but about the path. Up until the Covid-19 crisis, Japan had a level of debt which was about 250% of GDP – however, this was flat.
South Africa was on an upward path, and there was no apparent plan to arrest this path. Therefore, when South Africa announced quantitative easing it was possible, instead of complementing our actions, private investors would react adversely and take their money out of South Africa – which would defeat the purpose of quantitative easing. South Africa could go further. He is not saying the SARB could not go further with monetary policy as well, as he thought it could. However, the limits need to be understood.
The second question concerned the biggest structural change South Africa needs. It is about the ownership of the economy. Usually in economics it is assumed redistribution leads to inefficiency. In other words, there was a trade-off between redistribution of income and productiveness of the economy. People are often heard saying social grants create dependency. This is something he does not agree with. People are saying redistributing income to the poor will undermine the effort to work hard, which means there will be less production and efficiency in the economy.
Economists usually say the same thing about taxes, “If I know I am going to be taxed more, it may create an incentive for me not to work as hard because the proceeds of my work will not be claimed by me but go somewhere else”. So, usually in economics there is a trade-off between efficiency and equity or redistribution. One area where this does not necessarily apply is the redistribution of assets. The examples he used were about the redistribution of income and flows of money. However, when talking about the redistribution of assets or ownership of stocks, bonds, land, or human capital, a strong case can be made for redistribution enhancing efficiency.
In other words, assets can be redistributed and the economy can be made more efficient. For example, if there is a better distribution of human capital, for example, education, South Africa will also have a more efficient economy.
The challenge is if ownership of the economy is redistributed in a way to improve productivity and accelerate growth. The concentrated and one-sided ownership no doubt undermined productivity and growth. It is possible to redistribute the assets in a way which undermines growth or redistribute things in a way which enhances productivity and growth.
He thought this question was not properly thought of. The second set of issues concerned the macroaggregate, savings, investments, net exports, and consumption. Government announced an intention to support the revival of the economy through infrastructure investment. Unfortunately, South Africa is dependent on foreign savings to sustain itself – which relates to the sovereign wealth fund argument. South Africa is a country which spends more than it earns. It is not only the budget in deficit, but it is the whole country spending more than it earns. When more money is spent than earned, the money has to be borrowed from somewhere. In South Africa’s case, the money was borrowed from foreigners. To him, this made it strange to argue for a sovereign wealth fund. If South Africa were to increase expenditure on investment, it would have to rely on more borrowing from foreigners, unless one of two things can be done: (1) Simultaneously reduce consumption, by shifting money from consumption to investment; and (2) Expand net exports. Both of this would be very difficult. The export story in the current global environment is not going to be easy because wealth trade is in a difficult position. South Africa is entering a difficult wealth economy. Certainly, South Africa’s push towards investment-lead growth has consequences for its level of consumption or level of net exports. Both needs to be addressed.
Dr Seraaj Mohamed, Deputy Director, Parliamentary Budget Office, said private investors did not make fixed investments in Japan, USA, or the European Union in response to quantitative easing.
Ms Elzabe Rockman, Commissioner, FFC, thought it is important for Parliament, the NCOP, and Provincial legislatures to actively engage in a discussion around the identified gaps in the current draft of the tabled NHI Bill. The submission went into some detail which highlighted the problematic areas, as well as the effect the introduction of NHI will have on the role and functions of provincial health departments. The legislature must also actively engage in other legislation the challenge around the vacuum in legislation identified – for example, when it came to ECD or inclusive education.
Regarding the emphasis on the need for credible and reliable data and information systems, there are very pronounced levels of differentiation between where provinces are with information systems. The health sector is to specifically engage in the collection of data at source as a challenge, and the call for the national audit of health systems is critical. In addition, there is a call for the national audit and mapping of the ECD space – especially non-centre-based ECDs. There is some work which must be done around the efficiency of South Africa’s expenditure priority choices which are made going forward.
Mr S Kholwane, Commissioner, FFC, said as much as South Africa is consuming, it seems as though more is consumed outside of the country through importing than what is consumed locally through production, localisation, and import substitution, as a matter of trying to mitigate the current circumstances faced. The configuration of government in terms of the various levels and its interaction is one matter the Committee needs to look into. Government seems to be comfortable with the current status quo, despite having been in this setup for quite some time. Covid-19 provided the opportunity to relook how government configures itself at various levels, and what changes must be introduced to ensure all issues concerning inefficiencies and lack of service delivery can be fast tracked. This, including the issue of the State itself, must be looked into going forward.
The NHI, as it now stands, seems to suggest the role of provinces in the particular structure still need to be figured out.
Prof Plaatjies said when the President speaks to the R500 billion package, it is not put forward as a stimulus package but rather as a rescue relief package.
In response to Mr Ryder, he said the FFC is no longer printing. It is falling into the challenge of the current environment. He asked the Committees to provide support, and if not then Mr Henry Eksteen, (FFC) can assist Mr Ryder to get a hardcopy. A copy can be printed and couriered to Mr Ryder, which Mr Eksteen will assist with. Regarding the pareto multiplier effects, the FFC will look at this in terms of the key industries currently operating in South Africa. It will also look at the total factor production issues related to this. There are certain jobs which will be lost forever as a result of Covid-19. The reason why the FFC is raising the issue around local production value chain is because the South African economy needs to be looked at too.
New economies need to be looked at. These are the issues the FFC wants to see in terms of the stimulus package. South Africa needs to be careful about standardisation and one-size-fits-all issues, which do not allow for innovation. All programmes do not have to look the same in urban and rural areas. ECD is firstly about the safety and security of children, and secondly about the developmental programme.
Mr Rakabe answered the question around the R500 billion package. He said the FFC did not really start doing this work. It was only the previous day, through the FFC’s preparation for the submission, the FFC agreed it should collect information to look at how the R500 billion is used. Early indications are there is a low take-up rate, especially on the funds specified by National Treasury and the SARB. This is especially because there is a new system which had been setup. He did not think the SARB was necessarily ready to administer this kind of system – resulting in the low take-up rate. When looking at the supplementary grant and new R350 grant, an improvement was seen on the part of South African Social Security Agency in the disbursement of the grants. A similar improvement was seen in the UIF.
The following question relates to the lack of clarity on the division of responsibility for concurrent functions. The FFC is essentially proposing the subordinate legislation, such as the National Health Act and South African Schools Act, must make it very clear what different subfunctions will be undertaken by national and provincial government regarding concurrent functions. The subordinate legislation must particularly clarify if a function is delegated. This has implications for funding and the nature of funding used. This is essentially a result of the vague division of responsibilities. It increasingly appears as though functions are centralised, because of the gradual takeover of functions through conditional grants and through the direct implementation of projects by national departments. If there is a clear designation of roles and responsibilities, it is very easy to decide which nature of funds to use and which sphere of government is accountable for which services.
Ms Peters said there were many comments made about ECD, but there were two specific questions. The first question was an inquiry into what the FFC was saying about ECD funding. The FFC is saying ECD education requires strengthened funding. Currently, the sector only receives about 1.6% of the total education spent. The recommendation focuses on the funding present, which needs to be better targeted and assist the poorest learners. Registration requirements currently prohibiting non-centre programmes from accessing the subsidy need to be rethought. There cannot be a registration system where the majority of ECD programmes are excluded from it. The FFC is not saying there must be no standards. There must rather be a differentiated set of regulations which can also be considered. For example, one set of regulations for centre-based ECD programmes relative to those for non-centre-based ECD programmes, since its mode of delivery is fundamentally different.
There was a question raised about substance abuse. Substance abuse is not looked at specifically, but the issue FFC raised around the broader need for a more developmental and proactive approach to the delivery of social welfare services is applicable. There may be less of a need for statutory interventions or criminalising certain behaviours, if at risk family and community members are assisted before falling prey to social pathologies like substance abuse.
Mr Tseng answered regarding structural transformation. The ultimate question is what it is and how one goes about it. There was discussion surround this, including the issues about inequality and ownership. The architect of modern China, Mr Deng Xiaoping, once humbly said, economic development is like crossing a river by feeling for stones under one’s feet. In the 21st century, he thinks South Africa needs to do better than this. Firstly, South Africa needs to not just think about growing an industry or jobs in isolation. Economic plans targeting employment are not actually quite successful in history. Instead, South Africa needs to be more strategic and focus on understanding and localising the value chain. The value chain means from raw materials, to the intermediary, and all the way to the final goods and products. This is from a local economic perspective, depending on the niche area, climate, or uniqueness of the local economic characteristics. This requires always asking if products cannot be made locally, for job creation. South Africa cannot just be feeling its way through things. Informed decisions and actions based on facts, data evidence, and multiplier modelling are needed. Truth be told, some sectors may not survive the Covid-19 shocks, while some might just need to adapt or change. Underneath this humble statement is the way China developed, through learning by copying, and making everything at home to create jobs. This is a decision for the Committee’s consideration.
Prof Plaatjies said constitutional law and the FFC Act obligated the FFC to go to each province and present there. This presentation is being made to the two Houses of Parliament. Even if the provincial legislatures are present, the law still requires the FFC to go out and present as it must be recorded in the proceedings of the Parliament that it was tabled in terms of the constitutional law presentations to the two legislatures. He said he is happy the discussion steered away from the developmental status cause this time around. The Committees probably heard the last time the FFC said it had to be careful to not get to the developmental State, and not know the history of the developmental State. South Africa has a negotiated settlement and there are huge consequences to this.
Mr Cwaile said the late University of Stellenbosch emeritus Professor of Economics, Professor Sampie Terreblanche, was amongst the first from white communities of our nation to put it literally and blankly. He said Whites looted this country, and need to be considerate and make an effort to relinquish such interests and with nation building. No amount of political howling can alter this reality. Playing politics about the truth, all of majority of our resources were in private hands, with Whites dominantly resourced more than any other race. This is truth found in the facts. It is true South Africa had challenges of corruption and malfeasance, but despite such challenges of corruption, which remain a global challenge as well, it is true the economy is largely privately controlled.
Mr Ryder said it is not an issue if the document is not printed.
The Acting Chairperson Mkiva thanked the FFC for the responses provided.
Chairperson Buthelezi welcomed the presentation and responses by the FFC. He reminded the FFC poverty, inequality, and unemployment, were identified by government as the three big challenges of South Africa in many of its documents. This must be focused on at all times. A topic for discussion is how to get equality and equity within the economy. As to this being a challenge, it is a big problem which makes the country unstable – especially because it goes along racial lines. Classical economics would also say he is talking about the concentration of the economy. It will also say monopolies and oligopolies produce suboptimal economic outcomes, all of which we had in this country and which was bad for the economy. This must be addressed to see how South Africa can reach an economy where everyone can say it is their economy, and to find the most constructive ways of reaching it. The fact, 26 years down the line, South Africa is still one of the most unequal societies in the world is an indictment to all politicians and technocrats. He thanked everyone for attendance.
The meeting was adjourned.
Buthelezi, Mr S N
Mahlangu, Ms DG
Mkiva, Mr Z
Aucamp, Mr S
Botswe, Mr MM
Carrim, Mr YI
Cwaile, Mr MS
Du Toit, Mr SF
Joseph, Mr D
Kwankwa, Mr NL
Majake, Mr IM
Makhurupetje, Ms MG
Mathafa, Mr OM
Medupe, Mr OD
Moletsane, Mr MS
Njandu, Mr EJ
Peters, Ms ED
Phaladi-Digamela, Ms MR
Qayiso, Mr XS
Ryder, Mr D
Sarupen, Mr AN
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