Fiscal Responsibility Bill: public hearings
Finance Standing Committee
01 June 2021
Chairperson: Mr J Maswanganyi (ANC)
Video: Standing Committee on Finance, 01 June 2021
The Standing Committee on Finance met to discuss the DA-proposed Fiscal Responsibility Bill. The Bill proposed a debt ceiling for South Africa. The Bill sought to promote “fiscal responsibility” by obligating government debt exposure reduction, as well as introducing fiscal rules for the management of debt and government guarantees. National Treasury said the Bill alone would not resolve South Africa’s fiscal stability issues.
Debt servicing costs were crowding out expenditure in other areas, with Treasury embarking on fiscal consolidation measures, aiming for a debt-GDP-ratio of around 90% by the 2025 financial year.
Treasury opposed the Bill’s aim of limiting government ability to accumulate debt on the grounds it would not address the fundamental fiscal challenges in South Africa. It said a fiscal rule would not assist in strengthening public sector governance, reducing fraud and corruption, or turning around state institutions. Introduction of a debt ceiling would not alone solve the fundamental fiscal challenges, such as the poor composition of spending and borrowing.
Another consideration was implicit debt. Many countries with debt ceilings were able to violate those ceilings by building up accruals or off-budget operations, which could wipe out the gains of the debt ceiling, or worsen the situation.
The Bill’s proposal of targeting net loan debt, rather than gross loan debt would create incentives for governments to “game the system” by building up accruals or contingent liabilities in State Owned Enterprises (SOE’s).
Cosatu acknowledged the importance of the risks posed by the national debt. However, Cosatu rejected the Bill, despite welcoming the debate on public debt it raised. Issues such as corruption, wasteful expenditure, mismanagement of SOE’s, tax evasion, and economic stagnation, were more important for resolving the fiscal crisis.
Cosatu said the Bill sought to achieve its objectives by cutting the wages and salaries of public servants. It said this was unconstitutional and could collapse collective bargaining.
The Parliamentary Budget Office said the fiscal rules would make spending subject to unknown variables causing government expenditure to be uncertain and possibly volatile. This will affect fiscal credibility as well. Instead of top-down fiscal rules, there needed to be thinking about investment proposals.
South African Institute of Chartered Accountants (SAICA) said success of the Bill depended on political commitment. It was a big commitment, but without political will for the Bill, it would just be another administrative burden. Therefore, proper processes were needed backing the Bill. Parliamentary scrutiny was required. Limited escape orders were needed for the Minister and corresponding government officials to get out of the legislation. It had to be difficult not to comply with legislation. Critical sanctions and enforcement were needed for it to succeed. The acts already in place needed to be fixed and supported, as mentioned by the PBO.
The Free Market Foundation (FMF) said benefits of fiscal responsibility accrued over years and decades. While the temptation was to keep on spending ad nauseum in the interest of appearing to do something, the temptation needed to be resisted at all costs. Fiscal prudence to act and reign in spending on all manner of projects was needed. It would indicate to businesses and investors the environment it operated in, would not be stifled by the “insatiable hunger” of the big spending State. If government wished to play a reliable role in citizens’ lives, and helped to improve people’s lives, it needed to take the difficult necessary decisions to reign in unnecessary spending. Providing an element of welfare and social assistance to indigent citizens was something which could be supported, and needed to happen. It could only exist in a consistent, reliable form if government, which does not continue to accrue debts.
The DA said the Bill was linked to the DA’s proposal for public sector workers such as nurses, teachers, police officers, and social workers to have inflation-linked wage increases. The Bill targeted reductions in public sector wages for the 29 000 “millionaire managers” in the public service.
The DA said it was an important discussion. South Africa was in trouble. Treasury said it needed money to spend on creating economic growth. If there was no growth, the fiscal condition would remain unsustainable. On the other hand, if the fiscus was in trouble and there was spending which did not stimulate the economy, which was arguably the case for many years, then what happens is, money is spent, and state expenditure does not align to create a conducive environment for the economy to grow.
Public hearings: Fiscal Responsibility Bill
National Treasury Submission
Mr Edgar Sishi, the Acting Director-General, National Treasury, said Treasury appreciated the intention of the Bill. The focus needed to be on achieving existing policy objectives. Treasury was willing to work towards constructive resolution of the fiscal deficit.
Treasury understood and believed the issue of addressing fiscal imbalances was very important, and stronger steps were necessary, than the ones currently in the system. However, Treasury believes evidence suggested the focus should be on achieving existing policy objectives and improving the performance of institutions, rather than adding additional constraints at the current stage of South Africa's development trajectory.
The Bill as written would not promote prosperity to start economic growth periods, and would worsen the conduct of fiscal policy, and thereby deepen the challenges of public finances. Treasury was prepared to work with Parliament and the Parliamentary Budget Office (PBO) to close fiscal imbalances, and consider various proposals. Regarding fiscal rules, any fiscal rule needed to be backed by decisive action to retain confidence and unlock impediments to investment and growth. The government needed to make progress in strengthening governance in the public sector on waste and corruption, and turning around key state institutions. These obligations could not be replaced with the consequences of it, and in Treasury’s view, could not be made better with a fiscal rule over and above what was currently in place.
Key Points on Current Discussion
On some key points in the discussion, fiscal rules needed to be credible. It needed to consider the macroeconomic and developmental context of a country. Looking around the world, debt ceilings had mixed results. In cases where debt ceilings were successful, the developmental needs of the country in question tended to be a lot less than in a country like South Africa, and/or the tax base tended to be a lot larger. One of the challenges in South Africa is the tax base remained the same, and from a policy perspective, measures were needed to expand the tax base. Treasury said in other jurisdictions, debt ceilings had not been successful. The European Union, for instance, departed from its own debt ceiling. The US government consistently breached its own debt ceiling over many budget periods, destroying its credibility. The introduction of a ceiling by itself would not solve the fundamental problems. The fundamental challenges of the fiscus included a poor composition of spending, where too much was spent on consumption rather than investment for instance, as well as poor composition of borrowing.
South Africa was not at this point yet, but there are countries where over indebtedness, particularly in foreign currency became a problem. A very important issue was one of implicit debt. Many of the countries with debt ceilings were able to violate those ceilings by simply building up a clause, or building up off budget operation. Looking at what happened in South Africa, particularly with state owned companies, this problem needed to be fixed. As long as it remained, there was a very strong incentive to engage in off balance positive fiscal operation, in a manner which would not only wipe out the potential benefits on the debt rule, but could actually make the situation worse than it currently was. And finally, weak institutions needed to be strengthened. The 2021 Budget did not propose a debt ceiling, but rather a debt stabilising primary fiscal surplus. The debt stabilising point was not defined in the budget.
The debt needed to come down and the specific focus in this regard was achieving a product of fiscal surplus. This meant government revenue which was higher than the amount the government chose to spend, excluding debt service costs. Treasury considered this the most appropriate approach to restore fiscal health
Factors Undermining Fiscal Credibility
Challenges in respect of fiscal credibility which Treasury was seeking to address as part of the budget tabled in February 2021, but also through other means, include strengthening institutions. The members were aware of a persistent deficit. Debt stabilisation was consistently pushed out. The question was why this happened, over numerous budgets. A big part of the reason why, was because of economic growth and economic performance. This contributed significantly to the deterioration in the debt outlook. If the economic growth problem as a core challenge was not addressed, Treasury did not consider, adding additional debt constraints would make the fiscal position, better. It went to the core issue of why the debt situation deteriorated the way it did.
Fiscal credibility was undermined by projections of economic growth versus economic performance. Consistent underperformance resulted in the fiscal deficit, and without addressing the economic growth issue, adding fiscal rules would not make the situation better.
National Treasury’s (NT’s) Assessment of the Fiscal Responsibility Bill
There was also an issue around revenue and its relationship to spending. The reason why the structural deficit became persistent, is spending decisions were made in response to short term improvements in revenue, which did not become permanent. Linking spending decisions to a permanent increase in revenue was key to restoring fiscal health. NT’s assessment of the Bill as was currently written to provide benefits, and certainly under the current circumstances, worsened the conduct of fiscal policy. Tying policy to a specific range of debt to Gross Domestic Product (GDP) would produce significant volatility in fiscal decision making, as things changed. This is especially because the ratio would be heavily dependent on what happened to the rate of growth and other macroeconomic variables the fiscus did not control, or fiscal policy did not control. Examples of these are interest rates, exchange rates, and the long-term part of the deficit.
The third issue was the Bill as currently written, would encourage pro-cyclical fiscal policy, and this will be a particular problem when the economy performs well. There was a time when South Africa had a debt to GDP ratio in the 20s. Setting a range could have unintended consequences in periods which could be pro-cyclical. It was also not clear why the particular range was chosen. Treasury did not consider there was much technical justification for some of the provisions in the Bill, and it was not clear why a ten percent reduction to compensation of employees should be the one mechanism to resolve a breach of the rule, or how such a reduction, could be achieved. There were many variables which influenced the debt stock, and it was not clear what this meant.
The coverage of the rules on the provisions was insufficient, and would not actually reduce the fiscal liability by targeting at loan debt and not gross loan debt for example. This would create an incentive for future governments to game the system by building up accruals. This happened in a number of countries around the world where there were debt ceilings - governments’ simply built-up accruals. It did this through commitments, bypassed debt, through contingent liabilities, state-owned companies and entities, or by accumulating sufficiently large cash patterns in the short term which offset the gross load number. Not only was the Bill silent, but the build-up of these liabilities and off-balance sheet instruments, also did not deal with liabilities at the sub national level, particularly municipal.
Treasury considered and continued to work on different kinds of fiscal rules. Treasury was ready to have conversations with parliament and the parliamentary budget office about options in this regard.
Guideline for Debt Sustainability
The issue of debt was complex, and in particular because debt projections were very sensitive to many things not actually about the spending decisions of government. This included economic growth, interest rates, the exchange rate, the rate of exchange between the rand and dollar, between the rand and the euro changed, and the extent to which some of the borrowings were in foreign currency.
Government did not have money. Government spent money it extracted from economic activity, either through taxes in the present, or through future taxation, otherwise called debt.
He thanked the Committee for the opportunity.
Parliamentary Budget Office (PBO) submission
Dr Dumisani Jantjies, Director, PBO, introduced his team, which included Mr Rashaad Amra, Economist, PBO, and Dr Seeraj Mohamed, Deputy Director: Economics, PBO.
Current Legislation on Fiscal, Debt and Guarantee Management
The current legislative framework, regarding fiscal responsibility and fiscal management, includes the Constitution, the Public Finance Management Act (PFMA), and the Money Bills Act. There are many mechanisms already in place to give guidance. There is a need to ensure clear economic development and mechanisms to address social challenges faced by the country. Any fiscal management and discussion needs to be tied back to this.
Recommendations of the Fiscal Responsibility Bill, 2020
Mr Amra said it was important to note the Bill required significant fiscal adjustment in the country, and over the Medium Term Expenditure Framework (MTEF), to realise its goals. Treasury noticed the debt issue was essentially a growth problem. Fiscal management was not a challenge, but growth was actually underlying the dynamics over the medium term. Another provision contained in the Bill, which required attention, was guarantees over the medium term. Guarantees were increasing as a share of GDP over the past ten years. However, it was expected to decrease as a share of GDP over the medium term. This was a function of certain factors which were outside of the management of the fiscus, for instance growth could slow down, or there was a contraction because of a continuation of the COVID crisis. There would need to be, regarding fiscal management, a revision of guarantees to Small Medium and Micro Enterprises (SMMEs), which could be very debilitating and very disruptive to the management of the fiscus. The underlying dynamics were not within the control of fiscal management authorities. The Bill required significant fiscal pressure and fiscal austerity to meet its provisions. This needed to be considered in the context of significant cuts to the expenditure ceiling, proposed for the past seven years and implemented in the context of the pursuit of stabilisation of debt, as a share of GDP. The ban was already effective, and Treasury was quite transparent about the matter. The PBO noted this adversely affected service delivery of per capita provision of Health and Education, and other key social services were adversely affected. At a practical level, when it came to the budget meeting and societal obligations of the State, the Bill had significant implications. To realise stabilisation of debt as a share of GDP through an arbitrary and unexplained metric, it would have significant impacts on service delivery and on the provision of public goods, which may not be socially sustainable or socially optimal. This also had an impact on GDP through government being a significant consumer and spender of goods and services.
Matters with Top-down Fiscal Rules
Dr Mohamed said there were concerns with top-down fiscal rules. Cutting edge academic, but also practical thinking about fiscal policy showed scepticism towards top-down fiscal rules. The 2008 global financial crisis and the COVID crisis raised critical questions about top-down fiscal rules. Even though the Bill spoke about provisions for getting permission not to stick to the rules, there were still concerns about constraints and delays, threatening the room for immediate action to save lives and respond to economic crisis. The possibilities of future pandemics, climate change, disaster events, and global financial instability, spoke to the need for more flexibility. It spoke to the need for governments requiring flexibility to respond, to mitigate risk, and provide stability in a world prone to instability. This was important to consider with the COVID crisis entering the third wave. Thinking about the role government played in promoting stability required rethinking the usefulness and prudence of using top-down fiscal rules. Fiscal expansion was also associated with economic growth which decreased debt, the debt to GDP ratio, and the fiscal contractions.
The Bill asked South Africa to commit to fiscal sustainability, but did not define fiscal sustainability. Instead, a top-down fiscal rule was being legislated. But the Bill did not provide evidence of the rules ensuring fiscal responsibility. Looking at the provisions in the Bill revealed it relied on variables outside of government's control. It was difficult for South Africa to predict nominal GDP or to forecast not only the government, but the Reserve Bank, and outside agencies, including credit ratings agencies. The Bill’s provisions would also force repeated revisions of expenditure and fiscal framework. This would negatively affect the efficiency of government programmes and its ability to plan. These measures and official changes in government could face significant public opposition, and opposition from labour as well. It could increase economic uncertainty for investors and prove it is not socially or politically feasible, and can further damage fiscal credibility.
South African and global growth could revert back to pre-pandemic lows after the initial recovery. There were concerns of a short rebound from the negative impacts of the pandemic and South Africa's debt to GDP level could be well above the range spoken about in the proposal. This could mean substantial across the board reductions in expenditure over the medium-term expenditure framework and well beyond. The rules could curtail growth and lead to worsening of the GDP levels, even when government had a budget surplus. The evidence of the past few decades is that austerity, fiscal consolidation, and government not spending enough money into the economy had a negative impact on GDP growth and caused debt-GDP levels to remain high. This would worsen labour relations, negatively affect productivity, and also constrain the rest of the economy. The Bill failed to provide evidence for service delivery improvement and economic performance if the rules were implemented.
Dr Jantjies said the fiscal rules would make spending subject to unknown variables, causing government expenditure to be uncertain and possibly volatile. This will affect fiscal credibility as well. Instead of top-down fiscal rules, there needed to be thinking about investment proposals.
Mr Matthew Parks, Deputy Parliamentary Coordinator, Cosatu, said Cosatu thought it was an important debate to have and welcomed it. The way the Bill was currently drafted would force Cosatu to reject it. It may have had some useful objectives for attacking the national debt, which Cosatu agreed had to be tackled. However, the current wording of the Bill dumped the Bill for corruption, state capture, and wasteful expenditure on public servants who kept the state afloat. Such an approach could collapse public services. Mr Parks agreed with the need to pay public debts, and the credit debate was necessary. The real causes of the fiscal crisis were the billions of rand lost to corruption and wasteful expenditure, directed at mismanaged State-Owned Enterprises (SOEs). Other factors were tax evasion and the stagnant economy. There was a tendency in such bills to draft cuts in ways which affected workers in ways which were unconstitutional, and affected the guarantees of rights to collective bargaining. There was no attempt to engage in collective bargaining in the Bill. In effect, the Bill would collapse collective bargaining as it would compel, by law, the State to impose brutal wage cuts on public servants for the foreseeable future. He called upon Parliament to reject the Bill as currently drafted. He appreciated the Bill’s objective of addressing the national debt, and Cosatu was deeply alarmed by the national debt and deficit level, especially the rapid growth in levels of debt. The rapid rise in debt put South Africa at risk of entering a debt trap in the next few years if not brought under control. Being forced to go to the International Monetary Fund (IMF) or other institution for a bailout would be devastating to public servants, workers, and the general working class. This would halt a huge amount of public spending in the fragile economy, threatening to stall it when it needed to recover from the deepest recession in the century.
He urged a national debate on the appropriate levels of national debt and what cuts could not be afforded. This should not be used as a populist attempt to mobilise a party base or appease the wealthy Chief Executive Officers (CEOs) of companies. This would come at the expense of the poorly paid nurses and cleaners, and would not help. All conditions of employment were supposed to be discussed at the Public Service Coordinating Bargaining Council, also guided by the National Economic Development and Labour Council (NEDLAC) Act, which required bills affecting labour market measures to be tabled there for engagement, which had not happened. Any attempt to collapse worker rights to collective bargaining, aiming to impose brutal salary cuts on workers through legislative means, was unacceptable. It would be a recipe for labour market strife and unmanageable tensions.
Bill’s inherently Flawed Drafting
The Bill focused on the wage bill as the sole cause of South Africa’s fiscal crisis and presented it as the sole point of intervention needed. It did not speak to a wider range of issues. South Africa’s wage bill was relatively stable as a portion of the budget for many years, despite headcount increases in critical posts such as nurses, teachers, police officers and doctors. Despite this, the headcount ratio of public sector workers to population declined since 1994. Every year this headcount decline was collapsing the state’s ability to provide quality public services.
It was also a false debate to compare public and private sector wage levels. Private sector wage level measures were significantly decreased by the inclusion of over 800 000 foreign workers, domestic workers, mine workers, and taxi drivers, all of whom were low paid, decreasing the aggregate wage levels recorded in the private sector. The state did not employ such categories of workers, whereas doctors, nurses, teachers, police officers, correctional services, and military personnel were state employees and could not be affected by these wage disparities.
The Bill should have focused more on the exorbitant management packages paid to political office bearers and management. The Bill made no proposals for adjusting these wages.
There was also the danger of the Bill ignoring the 40% unemployment rate. There were many who were dependent on relatives who were public sector workers lucky enough to have jobs. The approach of a wage freeze could therefore have a much larger effect, and spark a brain drain of skilled public servants.
It was unfortunate as well to see many public servants, South Africans in general, and especially the working middle class, were highly indebted. Slashing the Wage Bill for these people, would make it impossible to manage this - with huge impacts on the banks.
He urged debate on the wage gap in the public and private sector, as well as examining legislation such as the Companies Bill, to tackle it and compel the private sector to disclose wage gaps.
The real causes of the fiscal crisis needed to be tackled – the billions lost to corruption, wasteful expenditure, tax and customs fraud and evasion, as well as mismanaged SOEs. This was compounded by the stagnant economy, with companies closing, workers losing wages and jobs, leading to not being able to pay taxes and spend in the local economy. Going the easy route and seeking to put the Bill on public sector workers would not address the fundamental causes. The Committee would be back at the same crisis every year.
The fifth parliament passed the very progressive Auditing Amendment Act, which empowered the State to hold political office bearers, management and officials who were financially liable for misconduct, personally liable. Government needed to start utilising this, and people needed to see consequences for misbehaviour.
The correct message needed to be sent to the public. Matters of corruption were serious and met by empowered commercial crimes courts. Law enforcement and the judiciary needed to be put at the centre. There needs to be competent management in place at SOEs, and bailouts for corruption are not a responsible business model.
The economic recovery plan needed to be capacitated through local procurement, infrastructure and other economic stimuli and interventions.
In conclusion the Bill sought to dump the consequences of state capture and mismanagement on nurses, teachers, and police officers, and was not going to assist in addressing what needed to be done to fix the state and the economy. What had been presented would undermine labour legislation and Cosatu would reject it.
He acknowledged the correct intentions in drafting the Bill and welcomed efforts to address public sector debt. A press statement was issued in response to Cosatu’s submission for the Bill. It was unfortunate, as the statement differed to the Bill. Press statements did not have similar standings to bills, and Cosatu was responding to the Bill. He was happy to debate amendments, but the Bill as it is currently structured cannot be supported by Cosatu.
South African Institute of Chartered Accountants (SAICA) submission
Need for the Bill
Dr Sharon Smulders, Project Director: Tax Advocacy, SAICA, said the need for the Bill was acknowledged by all the previous speakers because of the debt problem in South Africa. Annual debt cost payments would exceed government spending on the most important functions, as identified by Mr Parks. These included Health, Economic Services, Peace, and Security. It was unsustainable and spoke to the need for the Bill. Finances needed to be stabilised. Government is committed to prudent financial management.
There are three definitions in the Bill which are not used in it. First, extra-budgetary government institutions were mentioned. This meant the Bill would be applicable to all levels of government and public entities engaged in financial activities. This would limit the scope for shifting financial responsibility off budget.
Regarding international fiscal rules, there are two ways of treatment. There are principle-based rules or mandatory targets. The Bill went with mandatory targets, stating certain debt-GDP levels, as well as government guarantees being limited to not being greater than those of the previous year.
SAICA is not comprised of economists and is not going into the issues dealt with by the PBO and Treasury. Looking at the Bill more holistically, the 50% net loan debt seems reasonable when looking at other developing countries. Budget surpluses are necessary to reduce debt. It goes without saying reducing debt has to be mandated by reducing expenditure. Transparency is important to ensure expenditure is reduced in the correct places, and essential spending on strategic projects is not jeopardised. Similarly with compensation, this cannot be cut across the board. It needs to be based on performance and service delivery. It could not just be a set reduction, similar to what Mr Parks mentioned. New Zealand has a system where budget surpluses need to be tendered for by different departments and municipalities. This directs spending to strategic projects, where it is needed most. It also promotes good competition and collaboration amongst different departments to ensure resolution of issues.
Regarding intervention, sometimes mandatory targets were not always effective. Two things were necessary – transparency and good principles, or procedural rules ensuring targets were met. South Africa was ranked top in the Open Budget Survey, meaning Treasury needed to be congratulated for the transparency aspect. Budget documents and forecasting were very impressive in this regard and were recognised worldwide. However, transparency was insufficient to ensure fiscal responsibility. Certain procedures were needed to back up transparency. One of these is forecasting. SAICA raised concerns about the consistently optimistic economic forecasts in budget reviews. This optimistic forecasting led to certain expenditure trends, leading to government exceeding what was budgeted for. There must be accountability and consequences for performance. Looking at the Auditor General’s report there was, clearly across the board in the public and private sector, not proper accountability and consequence management for non-performance.
There also needs to be correct reporting of expenditure. The use of the modified cash basis system of reporting, rather than the general recognised accounting principles leads to inconsistencies and “creative accounting”. This needs to be addressed.
Budgets also need to be aligned to compliance performance levels and strategic projects. This is critical to ensure outputs are budgeted for, and there is a link between the outputs and what was budgeted for, ensuring service delivery is achieved.
One of the important things the Bill allowed was exemption from the rules in a specific year. This applies if the Minister of Finance was able to provide a good reason for exemption to the Standing Committee on Finance, with ultimate approval from National Assembly. This undermined the purpose of the Bill, and created a low threshold, which seemed easy to get out of. Public procurement in a non-compliant system seems to indicate less chance of sticking to, or going below the debt threshold.
Success of the Bill
If government was really serious about ensuring fiscal responsibly, it needed to ensure the Bill was actually binding and more difficult to get out of. SAICA suggested a legislative process be put in place, which had to be approved by Parliament, after public hearings. There was also a reporting requirement on the Minister which ensured reporting on compliance, and required reasons for non-compliance.
The Bill would also be ineffective if there were not proper enforcement measures. Some countries introduced penalty sanctions, some introduced incentives to reach measures. Punitive measures included reduction of salaries of the minister responsible. Colombia included bankruptcy rules for municipalities, and asked the municipalities to get credit ratings from private companies.
If sanctions were not automatically applied, it would be easy to get out of.
The success of the Bill depended on political commitment. It was a big commitment, but without political will for the Bill, it would just be another administrative burden. Therefore, proper processes were needed backing the Bill. Parliamentary scrutiny was required. Limited escape orders were needed for the Minister and corresponding government officials to get out of the legislation. It had to be difficult not to comply with legislation. Critical sanctions and enforcement were needed for it to succeed. The acts already in place needed to be fixed and supported, as mentioned by the PBO.
The Chairperson thanked SAICA for always concluding presentations on time. Business Leadership South Africa (BLSA) was not present in the meeting due to conflicting schedules. It released a statement on the Bill [see attached]. The Free Market Foundation lost its senior manager.
Free Market Foundation (FMF) submission
Mr Chris Hattingh, Deputy Director, FMF, made the presentation.
The South African GDP contracted by seven percent in 2020. The Foundation’s view was the incorrect ideological and policy decisions prior to COVID-19 caused much damage to the economy, the middle class, and peoples’ prospects.
There is however an opportunity to implement responsible and sound government behaviour and expenditure, allowing the “private sector to breathe”, grow, and create jobs. In the Foundation’s view, being fiscally responsible meant understanding and taking the appropriate actions to ensure an environment encouraging increased wealth creation, as opposed to one with greater focus on how to redistribute an ever-smaller cake.
It was imperative for future fiscal stability, responsible government spending, and the country’s very prospects to have meaningful growth. Current debt and spending levels had to be reduced substantially over time, given the country’s junk status and credit ratings. Government needed to be seen to take responsible steps.
Lukanyo Mnyanda, the editor of Business Day, said even within the non-investment grade sphere, there were degrees of junk status with real consequences for the price South Africa was charged to borrow. This was affecting how much money was available for Education, Health, and other services.
The Foundation supported the Bill and strongly believed it should be enacted. Some recommended additions, including further reducing the burden of public sector wages. The greater proportion of the economy was controlled by the state; the more regulations and inhibitors there were on economic activity, and job creation. This meant more people were forced to rely on the state directly and indirectly.
The ongoing wage battle between public servants and the state was arguably the most important matter for government to resolve. The increasing downward fiscal slide was not on those public sector workers, but on the state, which decided to spend more on projects and grants aimed at increasing state control.
SOE’s were one of the largest burdens to the fiscus, the state, and ultimately South African citizens.
The Constitution required national, provincial, and municipal budgets. Budgetary processes needed to promote transparency, accountability, and the effective financial management of the economy, data, and the public sector. The Bill would give substance to such constitutional requirements.
He said the Head of Capital Markets Research: Intellidex, Peter Attard Montalto, said it was important when the country had excess cash and budgetary surpluses, it be used to reduce debt levels, lowering the risks of bond market volatility. The concept of flattening the yield curve, through better debt management strategies, was considered a public good in and of itself.
Cutting down debt was morally responsible regarding the burden left on future generations. Such debt burdens restricted economic activity and job creation. The Foundation did not believe the state should impose debt burdens on future citizens.
The Foundation supported the spirit of the Bill and believed if it was enacted, it would set government fiscal behaviour on a relatively more stable economic growth friendly path.
The Foundation also suggested excess surplus funds be returned to citizens through tax rebates. To empower municipalities and ensure it is responsible for its long-term behaviour; provincial and municipal governments needed to ensure its main budgets were balanced at the end of every fiscal year. Competition between municipalities would spur better governance and delivery of services, as well as the potential of losing ratepayers to more attractive and better run locales. This would encourage provisional and municipal governments to improve its financial standing and professionalism.
All and any of the borrowed funds needed to be ring-fenced for specific purposes, with concomitant deadlines, and appropriate levels of expectations.
The increasingly long list of SOEs needed to be whittled down to those of greatest national importance. It also needed to be limited in scope and provisions of services, allowing the private sector to deliver better priced services which citizens could choose to buy from.
The benefits of fiscal responsibility accrued over years and decades. While the temptation was to keep on spending ad nauseum in the interest of appearing to do something, the temptation needed to be resisted at all costs. Fiscal prudence to act and reign in spending on all manner of projects was needed. It would indicate to businesses and investors the environment it operated in, would not be stifled by the “insatiable hunger” of the big spending state. If government wished to play a reliable role in citizens’ lives, and helped to improve people’s lives, it needed to take the difficult necessary decisions to reign in unnecessary spending. Providing an element of welfare and social assistance to indigent citizens was something which could be supported, and needed to happen. It could only exist in a consistent, reliable form if government, which does not continue to accrue debts.
Mr G Hill-Lewis (DA) asked if there would be an opportunity for him to respond to the presentations [Mr Hill-Lewis is the sponsor of the Fiscal Responsibility Bill].
The Chairperson said he would allow other members to comment, then Mr Hill-Lewis could respond.
Mr W Wessels (FF+) said it was an important discussion. South Africa was in trouble, Treasury admitted as much. Government debt was out of control and South Africa was on a fiscal cliff. The situation and the mode of thinking had to change.
Treasury said it needed money to spend on creating economic growth. If there was no growth, the fiscal condition would remain unsustainable. On the other hand, if the fiscus was in trouble and there was spending which did not stimulate the economy, which was arguably the case for many years, then what happens is, money is spent, and state expenditure does not align to create a conducive environment for the economy to grow.
Money was not spent on infrastructure projects, as it should have been, especially on creating infrastructure for businesses to invest, grow, and create employment. Money was spent on other priorities.
He understood it was difficult to say expenditure should never be more than income, because if there was no growth, then state revenue would be reduced. Such a position was untenable. If the expenditure was higher than state revenue, the difference needed to be equal to capital expenditure. This would ensure government’s responsibility was to spend money on items and projects which would create economic growth, which was not seen in the past few years. This was the reason for the current fiscal situation. There needed to be fiscal responsibility, so government could not continue to spend money on items which did not align to economic growth. There needed to be a curve, where if more was spent than earned, meaning there was a need to borrow money, spending should be directed to grow the economy by investing in capital expenditure. This would curb the corruption and exploitation, which went with infrastructure projects in the past.
Dr D George (DA) said a Bill of this nature was vital for the development of South Africa. He understood the technical arguments put forward by Treasury. The difficulty was, South Africa was unlike the other countries mentioned in the presentation.
Treasury would most likely not want additional rules to work within. He knew it was extremely difficult for Treasury to hold government to account. One of the biggest failures of Treasury was the inability to hold government spending to account, not on important matters as infrastructure and social support for people in need, but on the enormous amounts of wasteful spending, seen with SOEs. This was one of the most crucial aspects when looking at the Bill, because Treasury made many technical arguments which he did not believe fitted South Africa’s profile well, because of the nature of the country’s history and economic trajectory.
Treasury was saying it wished to improve the performance of institutions, rather than make debt rules. It sounded like a “noble” thing to say, but history showed Treasury was unable to do this. He did not believe Treasury would be able to do it, because the wasteful spending continued to take place. The Bill was actually a protection for poorer members of society because it limited unsustainable spending. It did this, by for example propping up failed and corrupt institutions, rather than ensuring there was sufficient money for social services for people on the frontline of service delivery. There needed to be enough money to pay proper salaries, rather than wasting money on millionaire managers who had no value to add. The Bill was approached in this context, and not from a technical perspective. For him, despite many of the arguments made by Treasury having validity, the fact was for South Africans, comparisons to the countries made by Treasury did not work. South Africa was a unique country and needed unique solutions. He firmly believed the Bill was one of it.
Mr Sishi said the issue of financing Mr Wessels asked about, is focused on economic growth only. It was a long running issue, and was it was well written about, and debated about often in the literature. The idea of limiting borrowing to infrastructure was discussed and debated in Treasury as well. The question was if a correct policy decision had to be made prior to this, which included reference to certain political choices, for example, considering education, which was dominated by teachers’ salaries. Treasury considered this to be a form of investment. He asked how this would be treated in the context of infrastructure-constrained spending.
According to the budget structure, the priorities of the South African government mostly stayed the same over the years. More money was spent on education than anywhere else, and this has been the case for a very long time. The second largest amount was spent on social development, an amount which also did not change from year to year. Thirdly, money was spent on health, which also did not change because it was considered constitutional. When considering what constituted an investment for growth in the medium to long term, it was a set of political choices.
There were ways of linking financing to infrastructure. One could issue infrastructure bonds, forcing borrowed money to be spent on infrastructure projects only. This was looked at, and would continue to be looked at.
On the “big ticket stuff” it came down to the political choices made around what government needed to deliver and needed to do. This is what drove many of the spending decisions.
On Dr George’s question about building institutions and holding government to account, and if Treasury failed, the answer to the question was, Treasury alone could not be held responsible for building institutions, fixing institutions, or departmental behaviour. There was an entire government, allocated with specific powers to do so. There were also law enforcement institutions which had specific powers to enforce the law. The issue of lack of capacity was broader than just Treasury.
This had to be considered when looking at the landscape of capacity to enforce the law, and ensuring people who stole money and spent wastefully through maladministration were punished and held to account.
Mr Parks noted the DA proposed reform of the public service wage bill, where cuts could be directed. Cosatu looked at the proposal made by the DA, regarding what was not in the Bill, but was in the broader statement regarding the Bill. There were many issues. Cosatu was calling for some time to reduce the amount spent on management in the state. This involved reducing the wages of the 29 000 millionaire managers. Cosatu agreed with this. There was also mention of protection of nurses, teachers, and police officers from inflation. However, this was not covered in the Bill. There would be a different discussion held if such matters were included in the Bill.
Another proposal raised by Cosatu was the use of the Government Employees Pension Fund (GEPF) to help struggling public servants access affordable home loans.
The proposed cuts made by the Bill over multiple years, depending on the debt levels across the board, would pose a problem for Cosatu.
Cosatu appreciated the debate, and noted the need for a broader debate on what needs to be protected in the budget, what needs to be removed, and what the key principles are.
Dr Mohamed noted the point made by Cosatu regarding concerns about the public wage bill and inequality within public sector wages, as well as matters of efficiency and productivity within SOEs. The existing rules needed to be used in this regard. New goals could be suggested, but new rules and regulations for fiscal spending impact on government expenditure in the sense that these are usually blunt instruments which may not actually get the intended results. Such actions could cause problems within the public sector, resulting in instability within not only the public sector labour markets, but the rest of the country’s labour markets. Merely wishing to reign in expenditure and stop such spending, was a blunt instrument. Such issues should be tackled directly with better suited tools. He said within macroeconomics, particularly within fiscal thinking and fiscal policy, the question of government expenditure and how decisions were made around government expenditure was extremely important, particularly as an instrument of redistribution. Intergenerational equity is a matter which was also within the Money Bills Act. One must think about issues of intergenerational equity, and issues of leaving a debt burden on future generations. This is particularly true when government policies to promote redistribution were dealing with endemic increases in poverty and unemployment. The problem of people suffering was a current issue, not one for future generations. It was an issue which had to be dealt with, and one of the ways of doing so was by spending, and possibly, if necessary, taking such expenditure as a future investment in the country. This was intended for the current generation to be active economically, and promote a system where growth could support payments of the debt at a future date. Thinking about intergenerational equity therefore includes thinking about the current generation, not only future generations. This involved thinking about the suffering South Africa currently had, especially with the COVID-19 third wave looming.
On Mr Wessels’ question, the answer from Treasury was a good one. One had to be cautious of thinking about government, government budgets, and fiscal policy, in similar ways to personal finances and those of businesses. The notion of taking on debt only when it went to capital expenditure needs to be extensively considered. The example of social expenditure, particularly education, was really important as a counterargument to this. The money invested in children and young people immediately shaped those young people’s futures, and also all the people of the country, in the context of participatory economies.
Reply from the Sponsor of the Private Member’s Bill
Mr Hill Lewis said the goal of the Bill was to get debt under control in South Africa. Everyone accepted the premise of debt in South Africa being unsustainable. It posed an existential risk to the economy and livelihoods of South Africans.
He welcomed criticism and debate.
Since he joined the Committee, Treasury said it needed stronger fiscal rules. However, Treasury never brought any proposals to Parliament. This was when the Bill originated, because there was no progress on this matter. The Minister of Finance, Tito Mboweni, delivered the budget speech in 2018, noting South Africa needed fiscal anchors. The Bill was a proposal for a fiscal anchor, which Treasury spoke about. The Bill was the only product which was actually been tabled. He therefore took the criticism with a pinch of salt.
Mr Sishi referred to fiscal credibility, where there was a constant departure from the debt ceiling. This was the case in the USA, and he wished to draw attention to the Bill, which provided an escape hatch. It is important to note it allowed for parliamentary oversight of proper legal processes to initiate the escape hatch.
Fiscal credibility was already very low. This was partly as a result of Treasury’s adherence to weak fiscal anchors. Spending limits were constantly overshot. This was the reason for being in the current position of unsustainable debt.
He disagreed with the explanation regarding the crisis being a result of economic underperformance. He said this shifts the blame from government and Treasury to something outside of its control. While the economy underperformed, the agency and responsibility of Treasury could not be ignored, for example through the approval of bailouts, or presenting budgets with steep deficits year after year. Economic performance could not be the only source of blame.
He did not understand the concern regarding pro-cyclical spending, which was raised.
South Africa previously had low levels of debt-Gross Domestic Product (GDP). The whole objective of the Bill was to find a legislative way to return to this point. South Africa currently had a damaged fiscal credibility and there was lack of confidence in the economy. This needed to be resolved to regain investment credit status and to contribute to growth.
The cost of employment reductions was no longer the “elephant in the room”, it was the “elephant in the elevator”. Fiscal space shrunk significantly. He said 47 cents of every rand of government revenue was spent on the cost of employment. It was the fastest growing item on the budget. It had to be dealt with because there was no line item in the budget for corruption, which could be cut out. South Africa had to control what it could control. The police and the prosecuting authority needed to be capacitated to deal with corruption, but corruption could not be struck through with a pen on the budget.
The Bill was silent on accruals, but so was Treasury. He asked what Treasury was doing about accruals which are accruing. It was something which was discussed for years with very little action.
Other fiscal rules under consideration by Treasury included a debt limit. A debt limit was a far blunter instrument than a debt ratio cap, as proposed by the Bill. Debt limits put an actual amount on the total debt stock the country could have. On the other hand, with a ratio to GDP, if GDP grew, the debt stock could grow. It was not a Bill which sought to ban the government from borrowing any more money. It contained implicit incentives to grow the economy. If the economy grew, the debt to GDP ratio by definition went down, because the denominator went up. This meant there could be more borrowing. The incentive was therefore less blunt than the simple debt limit proposal.
He was thrilled to say debt was recognised as deferred taxation. It should be renamed to deferred taxation in the budgets. Deferred taxation made it clear the money had to be repaid at a certain date in the future by the authority taxing citizens.
Dr George and Mr Wessels spoke to the fallacious assumption made by Treasury regarding money not spent in the present through debt, saying money would not be spent. This was incorrect. Dr Mohamed was the biggest proponent of this. If it was accepted all debt was future taxation, if the country did not borrow, this money would be spent by private citizens more efficiently at a later time.
Mr Sishi said fiscal policy was partly to blame for the current predicament. He asked him who was in charge of fiscal policy. It was not the Committee, the public, or the economy at large, it was Treasury.
Replying to the PBO, he said the Bill would require significant fiscal adjustment. It was not something which could be avoided at this point. He drew attention to the interaction between the debt crisis and growth process. Part of the reason the economy was not growing was because of the perception of high debt risk and debt unsustainable debt, which manifested in junk ratings. If the debt could be brought down along with debt servicing costs, confidence in the economy would improve, along with growth. The two were strongly correlated. Growth could not be blamed for the debt crisis. It was of course true to say the economy was not growing as fast as it should. It needed to grow faster, but government needed to control what could be controlled. Borrowing could not continue until growth returned. This was not an option because the debt stock was unsustainable.
On guarantees, he said the State’s projections for guarantees were wrong every year. There was a low credibility attached to those projections. Guarantees should be cut and withdrawn from failing SOEs as a matter of urgency. He asked what benefit the public derived from the guarantees and bailouts over the years, and argued there was little to no benefit.
On the matter of guarantees, he took it as a compliment. He said Dr Mohamed mobilised Professor Joseph Stiglitz’s work as a counter argument. He was a big fan of Professor Stiglitz, an American economist, and respected him. In the context of a responsible, depoliticised, fiscal management environment, there should not have to be top-down rules as detailed by the Bill. But South Africa did not have those contexts. The purpose of the Bill was to depoliticise debt in South Africa for every government. Debt could not be a tool for political budgeting. It was far too dangerous.
Dr Mohamed said there was no evidence of service delivery improvements in the Bill, saying it may affect morale and government could face pressure from labour. He said it was inappropriate for the PBO to raise these concerns. These concerns were extraneous to the objects of the Bill. The Bill was about debt, not about what public pressure governments may face if responding to the conditions of the Bill.
He thanked Mr Parks for the commitments made regarding unsustainable public debt. Again, it seemed everyone in South Africa across the ideological and political spectrum agreed about the public debt was unsustainable and had to be addressed.
He said it was never the intention to cut salaries of nurses and teachers. He knew better than most the reality underpaid nurses faced in South Africa, because his mother was a nurse. The DA was the only political party which made a solid proposal to protect consumer price index (CPI) inflation-linked increases for frontline staff, including nurses, teachers, social workers, and police officers. The focus of the cuts in the Public Wage Bill would be on the so-called millionaire managers – the 29 000 people in the civil service who were not specialists, but earned over R1 million. The government pursued a blanket freeze approach to wages which the DA always said was irresponsible and harmed frontline service delivery staff. It was far too of a blunt instrument. Nurses needed to be looked after more than ever during the current times. He said to focus on cuts where there was room to cut.
He agreed corruption and state capture were huge contributors to public debt, but one could only control what one could control. There was no line item for state capture in the national budget. If there was, it would have been removed by this point.
There was an obvious attempt to redefine the debate on public service wages. He understood why this was done, but wished to say if Mr Parks truly represented the best interests of Cosatu’s members at large, then Mr Park’s should support getting public debt under control as soon as possible. The reason for cuts to the public wage bill, which were strongly opposed by Cosatu in the bargaining council, was because debt was unsustainable. More money was being spent on debt service costs each year, and it was the fastest growing item in the budget. In 2022 it would be larger than the total budget for Health, Education, Police, or National Defence spending. It was in the interest of the public sector to get debt under control, otherwise future cuts to public wages would be much larger. More importantly, it would not be up to Parliament or the government, it would be imposed by others.
The only reason cuts were being spoken about was because the fiscal situation was allowed to get out of control over the past decade.
He thanked Dr Smulders for her input. He thought the idea of tendering for budget surpluses from New Zealand was a superb insight and he said he would read more on it. It could potentially be the basis for future work done in the Committee. It was the kind of new thinking which was needed to solve the debt crisis. He was disappointed to hear the PBO and Treasury refer to South Africa as stumbling forward in crisis. Junk status and the critical crisis of confidence in the investment community made the debt unsustainable, yet the kind of new thinking Dr Smulders presented to find solutions were not engaged with. Instead, the focus was on tinkering and finding fault with the proposals. He urged a more proactive stance, and a more ambitious approach.
SAICA criticised the escape hatch in the Bill. He understood the criticism, but he was a big believer in the need for an escape hatch. Without an escape hatch, if such a Bill was signed in December 2019 before COVID-19 hit, there would have been a real problem. There are times where governments around the world have to take on more debt. Such actions were simply unavoidable in 2020 to save lives and keep the economy open. In this Bill, the escape hatch required parliamentary approval. This was where he wanted to empower the Committee and Parliament through oversight of debt sustainability. He did not mind the proposal made regarding public hearings, which could be included. He wanted the power to lie with the Committee, not Treasury.
BLSA did not attend the meeting, but he read its input and appreciated its support for the Bill.
He appreciated the Free Market Foundation’s support. He wanted to underscore what was alluded to on the importance of depoliticising debt. It was very much the purpose of the Bill. The concept of depoliticising debt in the budget cycle was important because debt was too dangerous. It was like the “crack cocaine” of budgeting and it was far too dangerous to leave it in the hands of any elected government. The reason so many countries in the global economy were awash with debt was because too few removed the teeth from the debt debate.
He referred to his understanding of debt as future taxation. No private citizen would have bailed out South African Airways (SAA) with the citizen’s own money, as the debt government did.
Getting debt under control protected the poor in South Africa. This was the purpose of the Bill. Rising debt servicing costs were cutting millions from Police, Education, and Health budgets. Nearly every frontline service in the country had budget cuts. The reason for cuts was nothing other than the Debt Bill, which was absorbing larger portions of the budget. This resulted in an element of austerity in the sphere of basic services in South Africa, for which the reason was debt. The Bill was aimed at protecting poor South Africans from budget cuts, and one way of doing this was the imposition of statutory requirements for debt management.
He appreciated the sentiment of debt sustainability shared by all participants in the meeting.
The Chairperson asked for administrative announcements.
The Committee Secretary, Teboho Sepanya, said there would be deliberations on the Financial Sector Laws Bill on the following day.
The Chairperson thanked the Members and stakeholders.
The meeting was adjourned.
Maswanganyi, Mr MJ
Abraham, Ms PN
George, Dr DT
Hill-Lewis, Mr GG
Mabiletsa, Ms MD
Nkomo, Ms Z
Skosana, Mr GJ
Wessels, Mr W
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