The Standing Committee on Appropriations was briefed by the Financial and Fiscal Commission (FFC) on its submission on the 2022/23 Division of Revenue and the Second Special Appropriations Bill against the backdrop of a fragile economic environment after the onset of COVID-19.
The Second Special Appropriations Bill requested R32.85 billion in additional funding as a response to the unrest that occurred in July 2021 across the country, when spending was planned to be reduced by R16.4 billion for the 2021/22 financial year. The Commission indicated that under the Bill, financial adjustments to Social Development, Economic Development, Defence, the Ministry of Police and Trade, Industry and Competition budgets could be expected.
The 2022/23 Division of Revenue was discussed in which the theme was the effects of COVID-19 altering the architecture of sub-national financing in South Africa. The Commission believed that a comprehensive and evidence-based analysis of the socio-economic impact of the pandemic is key to developing a set of informed recommendations that can contribute to reforming the economy to achieve an inclusive and sustainable growth trajectory. The Commission felt that a sustainable recovery process is most suitable and required for the current conditions in South Africa.
The FFC recommended that the support provided for the Commission and businesses post-unrest is critical, though the Committee must be alive to the fact that the provision of this support means other expenditure, such as infrastructure, will be negatively affected. The Commission acknowledged that it is a difficult balancing act to cut funding while still trying to ensure service delivery obligations are met. Though, the FFC believed a balance could be met when prioritising core versus non-core spending. The FFC also called upon the Minister of Finance to review policy options and recommended that parliament receive reports and more detailed information concerning outputs against the various proposed allocations.
The Committee raised questions regarding the manner in which the FFC finds expression in the annual strategic plans of government. It was also asked if the COVID-19 relief grant was leading the FFC towards issuing basic income grants (BIG). Other main topics of interest included sustainable recovery processes for job losses, policy changes towards consolidation, noting core and non-core spending, plans to measure the impact of stimulus packages on the fiscus and the importance of ratios above Gross Domestic Product (GDP) trends.
The Chairperson welcomed the Standing Committee to a meeting held with the Financial and Fiscal Commission (FFC) regarding its comments and views on the 2022/23 Division of Revenue and the Second Special Appropriations Bill. The comments and views of the FFC are critical for the working of the Standing Committee and other financial committees as they prepare for the tabling of money bills.
Dr Kay Brown, FFC Chief Executive Officer (CEO), welcomed Dr Nombeko Patience Mbava, FFC Chairperson, to the meeting.
Dr Mbava said that the FFC tabled its submission on the Second Special Appropriation Bill 2021 and its recommendations for the 2022/23 Division of Revenue against the backdrop of a fragile economic environment after the onset of COVID-19.
The impact of the pandemic on the economy and people’s livelihoods continues to be costly. It has created many challenges, including to the efficacy of the macro-fiscal system in accommodating pandemic induced challenges. The pandemic worsened existing inequalities and condemned many people to unemployment and poverty. The pandemic highlighted the shortfalls of basic goods and services in terms of quantity and quality. It also heightened imbalances and conflicts in society, especially concerning gendered issues. It has exposed the limitations in the country’s oversight, accountability and leadership mechanisms.
Second Special Appropriation Bill
Mr Chen Tseng, Director: Research, FFC, explained that the Second Special Appropriation Bill requests for extra funding. It is laced with extraordinary funds for emergency situations, such as 16(1) of the Public Finance Management Act (PFMA), which totalled R32.85 billion to be appropriated.
Mr Tseng applied the principle of proportionality to state that the R32.85 billion is double the amount of the fiscal consolidation in the 2021 main budget expenditure, where its spending was planned to be reduced by R16.4 billion for the 2021/22 financial year. This special appropriation is also 10 times the size of the fiscal consolidation amounts planned for the total appropriation by vote.
Through the Second Special Appropriation Bill, national government has migrated from a consolidated fiscal stance in the 2021 main budget to a technically expansionary stance with significant margins for spending more for the purposes of recovering from the unrest and the pandemic. Mr Tseng noted that South African locals and businesses would be prioritised.
Mr Siyanda Jonas, Researcher: Local Government Unit, FFC, reported that the total appropriation by vote experienced a reduction of R2.3 billion in the 2021 budget. However, the subnational transfers experienced a R5.2 billion increase due to provincial allocations for contingencies, mainly COVID-19 responses. Provincial equitable share and conditional grants were adjusted downward by R50.3 billion and R2.2 billion from the 2020 to 2021 Division of Revenue Bills, respectively. Local government equitable share, conditional grants and general fuel levies declined by R4.3 billion in total.
Signs of an economic recovery are slowly emerging, though GDP is still at a lower level than during pre-COVID. In the fourth quarter of 2020, GDP contracted by 4.1% year-on-year. The economic recovery continued in the first quarter of 2021, but GDP still contracted by 3.2% year-on-year basis. The largest financial contributors on a quarterly basis were mining, trade and industry which positively influenced GDP growth.
The official unemployment rate increased from 32.6% in quarter one of 2021 to 34.4% in the second quarter of 2021. The number of unemployed persons increased by 8 000 to a total of 584 000 individuals in quarter two of 2021. The unemployment rate, according to the expanded definition of unemployment, increased by 1.2% percentage points to 44.4% in quarter 2 of 2021. Mr Jonas noted that during quarter three and quarter four of 2020 and quarter one and two of 2021, many regulations were relaxed which allowed for job creation for South Africans actively seeking employment.
The consolidated budget deficit, which reached a record 14% of GDP in 2020/21, is projected to narrow to 6.3% of GDP in 2023/24. Government gross debt has increased to 80.3% in the 2020/21 financial year, from 63.3% in the 2019/20, due to Covid-19.National Treasury expects gross government debt to stabilise at 88.9% of GDP in 2025/26. Rebasing the GDP compresses, to some extent, these percentages, but not the trends.
Assessment of Second Special Appropriation Bill 2021
Ms Sasha Peters, Programme Manager: National Budget Analysis Unit, FFC, said that a total of R32.85 billion in additions has been proposed, mainly in respect of National Treasury, Social Development, Defence, Police and Trade, Industry and Competition votes. She noted that the reason for the Second Special Appropriations Bill is due to the combined impact of the COVID-19 pandemic and recent unrest.
The FFC reported that the purpose of the Bill is to report to parliament on urgent and unforeseeable expenditure that has already taken place under section 16 of the PFMA, which allows the Minister of Finance to authorise expenditure of an urgent or exceptional nature.
National Treasury Vote
R3.9 billion is proposed to be appropriated specifically and exclusively in respect of the South African Special Risks Insurance Association (SASRIA). The amount aims to respond to the impacts of the unrest in KwaZulu-Natal and Gauteng. The amount is dedicated to assisting SASRIA in honouring claims from insured clients that have suffered damages to their businesses. The Commission agrees with the steps to support the recovery of businesses, especially small and medium businesses that have been affected.
Social Development Vote
The Second Special Appropriation Bill of 2021 proposes that an additional amount of R26.7 billion be allocated to the Social Development vote – of the total amount being added to this vote, R26.2 billion is towards the reintroduction of the Social Relief of Distress grant. It was noted that the amount of R26.2 billion includes R9.76 billion which was tabled under section 16 of the PFMA. An additional R500 million has been added in respect of SASSA for the purposes of grant administration – half of which has already been transferred.
In May 2021, when the FFC commented on the 2021 Appropriation Bill, it cautioned against the impact of real cuts in this vote, especially in light of the bulk of the resources allocated is in respect of social assistance grants. The FFC raised concerns on how budget cuts would impact the poor and vulnerable. Over the past 15 months during the economic and health crisis, the importance of income support was observed through the provisioning of social relief grants. The FFC welcomed the next iteration of the SRD grant in which the eligibility criteria has been extended to include caregivers, which is likely to increase given the gender balance. The FFC recommended that the Minister of Finance consider the fiscal impact of the SRD grant.
R700 million was added to the defence budget - half of which was for the compensation of employees, and R324 million was provisioned for goods and services which were damaged during the unrest. R21 million was provisioned for the operations of the Southern African Development Community Secretariat. The FFC questioned whether there is a need to prioritise resources domestically for the sake of stabilising internal economic conditions.
The Bill proposed to add R250 million in respect of compensation costs associated with Visible Policing Programmes. When the 2021 Bill was tabled, the FFC observed that the police vote was significantly impacted by budget cuts. According to the Department, the plan to manage the reduction in resources was to reduce personnel numbers which was visible in the policing program. This raised concerns of how the Department would be able to meet its mandate going forward around preserving community safety and security.
Trade, Industry and Competition Vote
R1.3 billion was allocated in respect of the Trade, Industry and Competition vote in terms of section 16 of the PFMA. This amount comprises transfers to the industrial development corporation which aims to support businesses. The Commission felt that more information was required to investigate who benefits as a beneficiary, what are the conditions and expected outcomes from the support.
Concluding comments and recommendations
Overall, the FFC noted that the need for this Bill has risen from unanticipated domestic and regional unrest. The FFC recommended that the support provided for the Commission and businesses post-unrest is critical, although the Committee must be alive to the fact that the provision of this support means other expenditure, such as infrastructure, will be negatively affected.
Ms Peters said that diverting funds towards post-unrest recovery for businesses may affect fiscal accommodation and debt services costs. The Commission acknowledged that it is a difficult balancing act to cut funding while still trying to ensure service delivery and other obligations are met. Though, she believed a balance could be met when prioritising core versus non-core spending.
The Commission further advised the Minister of Finance to urgently consider policy options and affordability of some form of income protection/ Basic Income Grant (BIG). The FFC also recommended that parliament receive reports and more detailed information concerning outputs against the various proposed allocations.
2022/23 Division of Revenue
Dr Mbava discussed the 2022/23 Division of Revenue in which the theme was the effects of COVID-19 altering the architecture of sub-national financing in South Africa. The Commission believed that a comprehensive and evidence-based analysis of the socio-economic impact of the pandemic is key to developing a set of informed recommendations that can contribute to reforming the economy to achieve an inclusive and sustainable growth trajectory. The Commission felt that a sustainable recovery process is most suitable and required for the current conditions in South Africa.
Mr Tseng said, regarding Gross Domestic Product (GDP) rebates, that it only compresses the ratios of debt or deficit of GDP. It has no impact on the trajectory of the growing trend patterns of the ratios. When the Commission compared this to international GDP rates, it was found that South Africa is still behind Nigeria and Egypt. The economic growth fundamentals and domestic mobilisation must still take place.
The Commission indicated that the tourism industry is differentiated and certain industries must change in the face of COVID-19. Going forward, it raised issues of moving with caution to move with the trends and dynamics of the pandemic.
Chapter 2: Measuring the Macroeconomic and Fiscal Impacts of COVID-19 in South Africa
The FFC noted that the COVID-19 pandemic and lockdown triggered the most significant recession in economic history, inefficiencies in public sector service provision combined with the pandemic and overall shock to productivity. In terms of supply and demand sectors of the market, it provoked the highest levels of unemployment, poverty and inequality the country has witnessed.
Moving forward, the supply and productivity has adversely affected the economy through mass unemployment and deficiencies in total factor productivity growth. In terms of demand, shocks in consumption during the quarter two of 2020 contributed to the fall in aggregate demand, depletion in inventory stocks and a lack of imports undermines swift growth recovery through consumption. The amalgamation of these factors resulted in a low likelihood of a quick recovery in the economy when compared to pre-crisis levels of production.
In the annual submission, the FFC also examined financial stability that indicated that the producer price rose as a result of lockdowns. Recently, the FFC witnessed hikes in the consumer price index where these price hikes have adversely affected the consumer purchasing power, livelihoods and welfare of people. This indicated that the affordability has decreased significantly as a result of the constrained economic and fiscal space of the primary balance. The fiscal impulse was compelled towards a consolidated stance at the end of 2020. In terms of revenue, it was observed that an increase in the concentration and dependence on the personal income tax are moving towards more of an income-based or household-based portfolio of tax.
The FFC called for the alignment of economic reconstruction and recovery plan across all three spheres of governance, especially at a provincial and national level. The Commission further recommended to localise product value chain concept approach and procurement for inclusive growth and local job growth. The Commission also encouraged the Minister of Finance to eliminate fiscal leakages and inefficiencies.
[See slide 16 for further details on recommendations]
Chapter 3: Measuring the Effectiveness of Government Expenditure for Performance
The FFC focused on:
● The fiscal multiplier effect in relation to economic growth and social development in South Africa
● Alignment and effectiveness: government’s performance indicators in representing their mandates and purposes
● The size and shape of the wage bill
● Programme and performance-based budgeting (PPBB) in relation to the efficiency and effectiveness of government expenditure
On the fiscal multiplier effect, Mr Tseng noted an ambiguity in terms of the magnitude and direction of the fiscal multiplier effect. He said that there have been times where this has reduced poverty and unemployment, however this has been ambiguous in its results.
In terms of Key Performance Indicators (KPIs), the Commission found no shortage of KPIs, though there were persistent variances due to the lack of accountability.
On the wage bill, the results indicated a higher GDP when compared to other international competitors with developing or advanced economies.
The Commission recommended that the Minister enhance the consistency and coherence of the Department’s KPI to the financial commitments of their budgets via the technical guidelines and seek to incentivise the system. The public sector wage bill was recommended to be reviewed to reduce. Finally, the Minister of Finance was recommended to pay attention to the movements in the multiplier effects of expenditure as the economic environment is still very much changing due to the pandemic.
Chapter 4: The Impact of the COVID-19 Pandemic on the Local Economy
Concerning municipal consumer debt, Mr Jonas said that many municipalities were affected and various consumers, including households, businesses and government, were not paying what they owe to municipalities. The flow of revenue to municipalities was blocked by this which resulted in many municipalities defaulting on their payments to creditors.
The FFC indicated that municipalities must:
● Promote local economic growth
● Enhance revenue by considering new revenue tools
● Embrace e-government
[See slide 27 for further details discussed]
The FFC recommended that municipalities must take a detailed analysis of the services that they can provide which should be aligned with their financial capabilities. Municipalities should stimulate local economic growth by creating investment-friendly conditions and streamlining regulations that impede investments within their jurisdictions. Municipalities should consider additional revenue-enhancing strategies, such as the selling of redundant assets and creating new revenue-generating infrastructure. The National Treasury, through the Municipal Systems Improvement Grant (MSIG), should support municipalities to embrace e-government and diversify their revenue mix as part of building the financial resilience of local government.
Chapter 5: Addressing Gender Inequality Through Gender Budgeting in the Public Sector
COVID-19 increased issues of gender inequality and gender based violence (GBV). Despite this, government has committed itself to promoting gender equality, with local governments developing legislative prescripts and policies to promote gender equality. The FFC looked at the budget as an instrument to be used to promote gender equality. Various Departments were investigated to see where gender “mainstreaming” could be implemented.
The FFC study indicated crucial issues about government budgets and gender equality, including:
● Limited mainstreaming of gender issues
● Limited gender disaggregated data
● Lack of detailed departmental gender-specific performance indicators
● Legislative, policy and institutional framework on GRB
The FFC recommended that the Department of Women, Youth and Persons with Disabilities (DWYPD) and the DPME should finalise the institutionalisation of gender-responsive
planning throughout national and provincial government as envisaged by National Treasury, together with the DWYPD and the DPME, should spearhead the implementation of GRB and mainstreaming GRB throughout the entire scope of the budget process as it applies to the national and provincial government. In collaboration with the Department of Cooperative Governance and Traditional Affairs, GRB implementation and mainstreaming should be extended to the local government sector.
National Treasury and the DWYPD should consider the introduction of a formal gender auditing process to be conducted by a relevant independent institution in respect of the non-financial performance information of departments, entities and municipalities. The DWYPD should coordinate and spearhead initiatives focused on the capacity building of political and administrative leadership on gender-responsive planning, budgeting, monitoring, evaluation and auditing at all levels of government. Such initiatives are to include the training of budget officers on GRB and the use of gender-disaggregated data in the budget process.
The DWYPD should, on an annual basis, prepare a comprehensive report on how the Division of
Revenue Bill responds to gender inequality and how fiscal policies translate government’s gender equality commitments. The report should be tabled for consideration by the relevant
Committees of Parliament. The DWYPD, together with Stats SA, should provide explicit guidelines for collecting and integrating gender-disaggregated data to ensure the visibility of girls and women in government programme execution and in budgeting processes within the government. The Department should also invest in statistical capacity-building in government to improve the measurement of gender equality indicators and the collection of gender-disaggregated data.
Chapter 6: Testing the Means Test: Social Assistance in South Africa and COVID-19
The FFC re-examined certain key aspects of the grant system as well as the needed expansion of the similar system in response to COVID-19. The FFC found that the grant system in South Africa is still progressive and makes a useful tool for rebalancing the scales of inequality. The possibility of poor individuals being excluded is very low, with 80% of people that lost their jobs in 2020 lived in households where some form of social assistance was received. The combination of all these factors resulted in alternative targeting not being absolutely necessary.
The FFC recommended that, regarding BIG grants, government must consider the fiscal and socio-economic implications from an intergenerational standpoint with incentive systems in place, should this system be implemented.
Chapter 7: COVID-19 and Food Security
Government attempted to beef up food security by providing food parcels to recipients in need. The FFC discovered through their study that child hunger increased by 29% and household hunger increased by 8% indicating food security being greatly at risk during COVID-19. The old age grant proved to be effective in protecting households against welfare reversals. The combination of the old age grant, household grant and COVID-19 grant reduced incidents of food insecurity 78%, indicating a need to expand on existing social protection mechanisms.
[See slide 43 for findings]
Chapter 8: Water and Sanitation Access, Distribution Efficiencies and Tariff Setting in South Africa
The FFC found that access to water during the pandemic decreased by 2% nationally. Almost 17% of households had access to sanitation, while, when looking at water distribution, many inefficiencies were found across the system, such as water leakages.
The FFC found that water service providers could maintain the same output during this time with 40-49% fewer outputs. Inefficiencies were found to be driven by non-revenue profile provision which accounts for 35% of the input of volume of water
The FFC recommended that:
● Municipalities, advised by SALGA, should approach tariff adjustment, taking account of the poor during the duration of the COVID-19 crisis.
● The Minister of Finance should ensure that water and sanitation projects also form part of the economic stimulus to help mitigate the impact of the COVID-19 crisis.
● The Ministers of Finance and Water and Sanitation, together with the municipalities, should systematically develop water investment by structuring mechanisms to de-risk private investments. However, long-term sustainability depends on the capacity of water service providers, governance mechanisms to safeguard corruption and the ability of the private sector to manage both higher-level government demands and possible public opposition.
Chapter 9: The Role of Intergovernmental Oversight and Support in Avoiding a Section 139 Intervention
Ms Peters reported that the FFC examined to what extent the systems of oversight and support can help to avoid section 139 interventions. The FFC held concerns that the persistence of section 139 interventions raised questions concerning the oversight and support framework and the value it adds in terms of acting as an early warning system that allows us to identify municipalities facing the potential threat of intervention.
[See slide 52 for findings]
The FFC called on the Minister of Cooperative Governance and Traditional Affairs (CoGTA) to implement mechanisms to ensure that evaluations of the impact of the entire oversight and support framework is undertaken. An emphasis must be placed on cost benefit analysis with new regulations monitoring and support initiatives introduced.
The FFC also recommended that government should consider the current uniform approach that has been implemented in the oversight and support framework and that the differentiated approach recognises the varying capacities of municipalities be considered with requiring compliance with reporting requirements. It was further recommended that the Minister of Finance ensure that provincial treasuries are capacitated to undertake the oversight and support role.
Chapter 10: Leadership, Management and Governance for Sustainable Public Service Delivery
A case study was conducted on two catalytic housing projects, namely Duncan Village in the Eastern Cape and examining the bulk water supply project in Giyani. To examine accountability, irregular expenditure was used as a yardstick to look into the Department of Human Settlements, and Sanitation.
On findings, the FFC discovered that approved business plans are often not properly costed which makes it difficult to assess a true sense of the finances required. The Commission also found a lack of intergovernmental coordination resulting from poor consultations amongst the various stakeholders involved in infrastructure projects.
There are numerous players involved in the implementation of catalytic housing projects which have different priorities in terms of their infrastructure plans and sources of funding. There were instances where municipalities lacked capacity. The housing and development agency had been tasked with implementing the catalytic projects which gave rise to tensions between the agency and municipalities, with a number of municipalities indicating that they were not properly consulted on key decisions.
● The Minister of Finance, in the Division of Revenue, should ensure that commitment to compliance with legislation and policy frameworks is formalised with all participants in an infrastructure project prior to the commencement of the project, with financial consequences for compliance failures clearly set out.
● The Minister of Cooperative Governance and Traditional Affairs should review the intergovernmental coordination policy framework and consider strengthening intergovernmental coordination both vertically and horizontally. The intergovernmental relations arrangement clearly defines how the three spheres of government should work together in the implementation of a number of mandates, including infrastructure delivery, but is silent on how coordination between these spheres should be managed.
● The Minister of Finance, in the Division of Revenue, should incentivise consequence management. This will ensure that all public office bearers are held legally and personally responsible when they transgress supply chain management policies in the implementation of infrastructure projects
Ms D Peters (ANC) recommended, regarding the findings from the Division of Revenue 2022/23, that when the Standing Committee appears before entities of the state, issues of gender, rural development and the impact on the youth and people with disabilities should be included in the targets for the National Development Plan (NDP) 2030. She said that areas of concern included schools with infrastructure challenges, roads, water and housing accessibility in rural areas.
Ms Peters recommended that departments report to the Standing Committee on the impact of their budget on mainstreaming gender issues and the status of payment in municipalities. There are government departments at provincial and national levels placing immense pressure on municipalities to alleviate the accumulating debt. She recommended that the Department of Public Works and Infrastructure (DPWI) and CoGTA report to the Committee on payments within municipalities, over and above the 30-day payment of small businesses.
Concerning intervention grants for food security, Ms Peters questioned whether the findings from the COVID-19 grants was a justification for the BIG and whether this was feasible for South Africa. She said that there was a contradiction between the need to increase taxes through higher VAT rates and issues of job scarcity faced by taxpayers. Sister committees of the Standing Committee should be consulted when making recommendations to ensure that the findings find expression in parliament.
She said that there must be ways for the Chairperson, when engaging with other committees, should be able to examine the necessary requirements and provide progress in terms of implementing the recommendations.
Mr X Qayiso (ANC) emphasised that gender issues should be entrenched into the work of Parliament and should be brought across in the processes of all other portfolio committees. He recommended that the Department of Planning, Monitoring and Evaluation (DPME) be more involved in tracking whether issues of gender transformation permeate all levels of different government institutions. He recommended that all sister committees should be involved in monitoring these aspects of gender transformation.
Regarding the Second Special Appropriation Bill, Mr Qayiso asked the FFC what policies should be put in place to ensure job security in businesses and workplaces greatly affected by the unrest. He said that there must be a way to ensure a return on investment after providing financial support.
On the increase of rape and sexual abuse cases, Mr Qayiso asked what prompted this increased statistic for women. He asked the FFC to elaborate on what a possible catalyst for this increase could be and what instigated the sudden increase of unemployment for women and youth.
He asked, concerning the impact of COVID-19, whether the FFC is progressing towards the ‘new normal’. He felt that it was important to have a long-term plan which considers the progression to the new normal which would boost economic growth.
Mr A Sarupen (DA) asked the FFC whether they identified spheres of non-core spending and where potential reprioritisation could happen. He exemplified reprioritisation of funding by stating that the VIP protection budget continues to rise as communities are failing to receive adequate security. He questioned what the responses are to recommendations made to ministries and other departments for the sake of maximising economic spending.
Mr O Mathafa (ANC) asked what the role of the Ministry of Finance is to enhance the emergency planning budget to prevent the need to reprioritise funding from other departments in event of an emergency. He asked whether non-core spending has been evaluated to avoid destabilising the fiscus.
Regarding government packages to stimulate economic growth, Mr Mathafa asked whether the impact could be identified to measure efficacy and areas for future improvement within the available packages. He said that issues of localisation and local economic development need to be realised, especially in rural areas. How does the FFC plan to measure the impact of these packages and whether they are stimulating economic development that is inclusive of African people, youth, women and people with disabilities?
Mr Mathafa asked whether the FFC analysed the possible pronouncements made by the President and how the particular objectives would be impacted. He asked where the Committee could expect to see a reduction of those objectives, especially where relating to NDP goals. Is the Committee likely to see interventions from other departments to ensure that the presidential mandate is not negatively affected?
Regarding reprioritisation, he asked what impact could he expect to see on the new zero-based budgeting approach. Are there any disruptions that this would bring on board in terms of the effectiveness of this particular position assumed by the country?
Ms M Dikgale (ANC) said, concerning social grants, that some people in rural areas are yet to receive the R350 relief fund while the President has promised a new social grant in addition to the original grant. She asked when people could expect to receive the initial R350 grant. She appreciated that, during times of gender inequality, the FFC is being led by a qualified woman.
On the rebasing of GDP, the Chairperson asked what was not properly accounted for and what that meant in terms of the credibility of the Department’s numbers.
He said that, while trends are important, it is key to note the ratio of the numbers as it forms the basis for many important decisions. In 2017 or 2018, a similar issue occurred where the Statistician-General had to change the export numbers due to them being undervalued. He said that when considering budgets these figures were imperative.
The Chairperson felt that the basic income grant was favoured which places a great demand on resources that are already constrained, while the Second Special Amendment Bill made an 80% turnaround from the consolidation framework. He felt that it was contradictory to produce interventions for the Second Special Appropriation Bill which goes against trying to consolidate a budget for the basic income grant.
On multiplier effects, the Chairperson asked the FFC what its stance is of the injection of R32.85 billion in the economy GDP in general, keeping in mind that the Social Relief of Distress Grant (SRD) is increasing which increases the disposable income of consumers, and what the impact would be on investments for people supplying goods and services.
The Chairperson felt that within the presentation it was omitted that the budget the Minister announced which had a decrease on company income tax. He asked for the views of the FFC on this matter.
Concerning gender mainstreaming within available budgets, he agreed that this was a key focus area to ensure inclusivity in the economy. He asked whether there were other countries that could be used as a case study where this has been properly implemented and what the impact has been in those areas.
Ms Mbava said that it is critical that government departments realise the recommendations, especially concerning gender responsive budgeting where there is ample information available which is yet to find expression.
Mr Tseng noted, in regard to the COVID-19 and basic income grants, it was a misuse of language in terms of tax policy to say that VAT would be increased. He said that rather the FFC meant that the burden of VAT would be lifted, especially relating to food and food production, to ease the flow and alleviate costs. He explained at VAT is a consumption based tax that allows for targeting and selecting specific basic food types.
On monitoring and evaluation, Mr Tseng said that it is important to be aware of the costs of monitoring and evaluation when producing reports. He said that the Committee should also keep in mind the effects of the unrest on consumers as it has hampered confidence, ability and access for consumption. The FFC advised that security and stability be established and upheld consistently in order to restore confidence in consumption and create an environment for job creation.
Concerning ‘the new normal’, Mr Tseng felt that South Africa is still very much in the phase of the old ways. He said that certain spheres, such as NDP, were completely unprepared for the COVID-19 pandemic. It was agreed that the new environment requires new ways of thinking which were prescribed in the NDP targets years ago.
He said that when considering non-core items, the FFC faced the challenge of cutting down expenses at an aggregate level. Due to bigger issues failing to be reprioritised properly, it has stagnated the advanced stages of identifying core versus non-core items.
On the zero-based budgeting approach, the Second Special Appropriation Bill indicated that its advancement has been hindered and that there is a danger of abandoning the zero-based budgeting approach. The FFC advised National Treasury and the Ministry to re-evaluate that stance and how it may have to be revised.
Regarding GDP, Mr Tseng said that rebasing GDP is important for a country’s macroeconomic standing in order to stay relevant. The FFC has rebased some of the financial sectors to have more emphasis on GDP measures and an overall change in measuring production and expenditure approaches to the GDP.
On multiplier effects, the FFC found in their research, after examining stimulus injections and attempting to preserve consumption, that the tax envelope base has shifted towards being more consumption based. He explained that ratios speak in relative terms by comparing South Africa relative to other countries. The rebasing of the GDP has pushed the FFC in front of Colombia. This indicated that South Africa’s statistical capability in measuring macroeconomic indicators is still effective. The small rebasing also indicated that the South African economy has not undergone drastic change in terms of our economic growth patterns. He expressed great concern over this.
Mr Tseng said, on basic income grants, it is important to consider the incentive structure or incentive growth path that the country plans to take on. He suggested that incentives could be attached to basic income grants to promote long-term growth for job creation or increased economic activity. He hypothesised that the multiplier effect could become muted. The latest multiplying measure was indicated at sitting close to zero with some time periods extending into negative regions.
Concerning company income tax, due to all of the recent changes, South Africa has reached the limits of tax revenue rate elasticity over the past ten years. If the rates were to continue to increase, businesses would not continue to grow and the overall profits of the country would begin to decline. It was for this reason that in recent years the Minister of Finance decreased rates to get back onto the curve of elasticity.
The Chairperson asked what type of returns could be expected from a reduction of company income tax.
Mr Tseng responded that South Africa could stand to gain more from company income tax if some of the rates were sufficiently reduced to try to get business activities to flourish, according to the elasticity curve. He said that over the past ten years, the substitution effects were observed at higher rates and total revenue has decreased. He hypothesised that there could be increased revenue if the tax rates were decreased and kept at a stable rate.
On basic income grants, he said the Department is mandated to provide grant incomes to households as a means of living, especially during the pandemic. However, the FFC recommended that certain incentive benefits be put in place, in addition to the basic income grants, for future economic growth patterns. These incentives are expected to encourage job participation.
Ms Mbava said that the submissions illustrated the macroeconomic impact of the pandemic across the economy and the long-term health of public finances, especially stabilising the debt to the GDP ratio and the containment of fiscal leakages, is absolutely critical currently.
The Chairperson asked the FFC whether it has been investigated what is occurring at a local government level in terms of State-Owned Enterprises (SOEs) which are owned by local municipalities.
Mr Tseng confirmed that the FFC has considered the various SOEs. He said that, due to the magnitude of local SOEs, provincial legislatures were consulted and observed trickling down effects. He said due to this system it is bound to have leakages. The FFC is faced with SOEs at a subnational level with qualified orders, irregularities and wasteful and fruitless expenditure. The FFC has encouraged local SOEs to reduce fruitless and wasteful expenditure, as it is difficult for the national sector to intervene in small agencies.
He explained that SOEs have become a spending vehicle for subnational spheres which becomes a danger as money is immediately transferred and spent unilaterally.
Ms Peters congratulated Ms Mbava on her appointment as Chairperson of the FFC.
Mr Qayiso asked whether there is any relationship between what was said by the Auditor General around the issue of revenue and other collapsed services within municipalities in the presentation.
Mr Tseng responded that local governments have picked up the recent deterioration. In 2018 when the 2019 Division of Revenue was tabled, the FFC noticed that, despite all of the support structures, it seemed as though no matter what was done the situation continued to worsen. The FFC considers audit outcomes as a symptom, rather than the illness which is far more complicated to understand. He said that the illness may come from the grand visions of green economies envisioned by municipalities while they are still failing to deliver the basic services mandated by the Constitution. He said that first households should be provided with access to basic services before greater visions of economic expansion are pursued.
On a case study of gender mainstreaming, Mr Tseng said that many countries, including France, Canada and Australia, have had advanced dialogues in that regard. He said that while South Africa is not too far behind, he felt as though it had not been implemented properly anywhere. He attributed this to there not being a comprehensive analysis of the differences and factors in play when implementing gender mainstreaming.
He said that in economics there has been extensive research into the battle of the sexes, however when trying to bring all of those complex issues into injecting it in the public sector or the economy, it becomes far more complex.
The Committee considered the minutes from 25 August 2021 for adoption.
The minutes were adopted without any amendments.
The Chairperson noted that, while the Committee has placed great focus on national SOEs, many SOEs at provincial and local governmental levels go unaccounted for. He suggested that the Committee look into this by receiving reports on the state of SOEs in municipalities which face challenges that mimic that of national government.
The meeting was adjourned.
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