Division of Revenue Amendment Bill & Adjustments Appropriation Bill: PBO & FFC briefing

Meeting report

FFC briefing on Division of Revenue Amendment Bill and Adjustments Appropriation Bill

Opening comments

Dr Nombeko Mbava, Chairperson: Financial and Fiscal Commission (FFC), said the recent economic "green shoots" exemplified by positive gross domestic product (GDP) growth in the first and second quarters of 2021, was a foundation for a sustained economic recovery and a stable fiscal path. However, the trials for economic recovery continued to mount, with pre-existing structural bottlenecks that severely constrain growth. Intermittent energy supplies and corruption in policy making and execution culminates in the loss of confidence or in increased borrowing costs for the bonds that are issued. South Africa must seek to avoid withdrawing its fiscal support to vulnerable citizens too early, and must signal to the public that its debt levels are sustainable in the long run by eliminating leakages and executing reprioritisations that are productive and constructive. The Commission agrees that the revenue windfalls should not be fully committed to further expanding expenditures that have already grown far beyond South Africa's means. Instead, the revenue windfalls should be used to defray the structural budget deficit as much as possible, and offload the growing debt service cost, with its redemption requirement.

National debt and state-owned enterprises (SOEs) remain a binding constraint to growth and a risk to fiscal sustainability. Debt servicing cost was the fastest growing expenditure line item, with a 10% annual average growth rate over the 2022 Medium Term Budget Policy Statement (MTBPS) period, with debt servicing costs accounting for 12% of total consolidated spending in 2021, rising to 16% in 2024/25. The detrimental effect of servicing costs crowding out social programmes could lead to the total collapse of basic and social services, as funds intended for core spending were diverted to servicing the debt.

The Commission therefore acknowledges the difficulties in moderating debt growth within a subdued economic environment and recommends an improvement in cost efficiency of spending and closing the fiscal leakages to offset the growing deficit and debt. The Commission welcomes the 2021 MPBPS presented by the Minister of Finance, and particularly notes the government’s efforts to maintain a modest expenditure growth while making sure that spending areas are preserved. However, the Commission remains firm in its stance that the need to exercise economic restraint to achieve fiscal prudence must not come at the cost of the social economic conditions of the people that it seeks to redress.

FFC submission on 2021 MTBPS

Mr Chen Tseng, Director: Research, FFC, presented the economic overview, including the global GDP overview and projects, global inflation rate, domestic real gross domestic product growth, domestic consumer price index (CPI) headline rates, and the 2021domestic unemployment rate. He provided the fiscal outlook, covering South Africa’s tax-to-GDP ratio, and the main budget revenue and expenditure for this year.

He said the Commission supported the economic reforms tabled by the Minister of Finance, which focus on improving competitiveness by lowering the barriers to entry and developing logistics systems infrastructure that would create employment. He also emphasised that the need to exercise financial restraint to achieve fiscal prudence must not come at the cost of the socio-economic conditions of the people needing support.

The FFC also reported on the 2021 Adjustment Appropriation Bill, with the consolidated expenditure by function; and the 2021 Division of Revenue Amendment Bill, with the provincial allocations, local government allocations and local government conditional grants,

A briefing was also presented on fiscal risk comprising, of debt management and contingent liabilities. A report was presented on the compensation of employees (COE) as a percentage of total expenditure, the number of public sector employees from 2009-2019, and changes in employment between 2019-2021.

Parliamentary Budget Office presentation on 2021 Adjusted Budget

Dr Dumisani Jantjies, Director, Parliamentary Budget Office (PBO), presented a summary of the 2021/22 adjustments; the national allocations for COE; employment and livelihood support programmes; regulations versus requests on roll-overs; in-year performance of national departments' past adjustments; division of revenue; changes to the provincial and local government conditional grants; division of revenue over the medium term expenditure framework (MTEF); changes to the provincial and local government equitable share and conditional grants; efficiency and effectiveness of expenditure on conditional grants; and past performance by national votes.

Referring to the 2021/22 adjustments, he said total estimated expenditure showed an increase of R15 billion, and included a contingency reserve of R2.96 billion.

Discussion

Mr O Mathafa (ANC) said according to slide 20 of the FFC presentation, servicing costs seemed to be increasing from the current financial year to the year 2024/2025. What was the cause of this increase, because it was common knowledge that as debt decreased, the servicing cost should decrease as well, unless the country was servicing only the interest part of the debt and not attempting to defray the principal facility.  

He asked the FFC and PBO to report on the transport vote, particularly with reference to the public transport network grant. This seemed to be a recurring issue -- what could be the factors preventing this amount from being spent, because R1.9bn on transport was a huge amount that could not be ignored.

On slide 27 the FFC referred to the capacitation of councillors. The Committee agreed with the Commission that resources must be set aside to ensure that upskilling did happen at municipal councils, particularly those that were formed through coalitions. Awareness must also be created about the shortage of skills in administration as well.

He asked the FFC to advise on the best approach to ensure that the interventions by National Treasury under the capacitation grant and SA Local Government Association (SALGA) were measurable towards ensuring that councillors and administrators were developed to reach and achieve the skills that were required, in order to operate optimally. This followed SALGA’s report that about 22% of councillors did not possess the basic computer skills needed to review reports.

It was pertinent that there was a clear understanding of the reasons for the contingency reserve. Where resources were kept aside and were not assigned to particular votes and could not be accessed, then they could not qualify as a contingency reserve. There should be some sort of limitation as to how far they could be accessed and used for.

On reductions around the National Health Insurance (NHI) scheme, he asked if it was correct to say that the NHI was no longer a government priority, because on slide 17 of the PBO's presentation, the sum of R343m was moved from the NHI to the human resource training grant. Was there a phasing out of the NHI scheme, or was it no longer a government priority?

The presentation reflected a declining spend of assets. This was a cause of concern, because once assets were created, the balance sheet was enhanced and became heavier. If there was a trend of a declining expenditure on capital assets, could it be as a result of an under-performing balance sheet, or could it be as a result of the state's failure to create assets of ownership for future generations?  While efforts were being made to promote infrastructure as one of the catalyst for economic growth, this goal was not seen to be achieved in terms of performance.

Ms N Hlonyana (EFF) asked for clarity on the increasing debt servicing. If provinces were striving to meet their obligations on education and health, how would debts affect the provinces that were forced to cut back on their services within those sectors? Secondly, the conditional grant to provinces had been decreased, and this may affect some projects. While some pending projects may stop completely, the progress of others would be negatively affected.  She suggested that projects that had already commenced should be completed. How would the poor and vulnerable, which comprise the majority of the society, be protected?

Economic growth did not seem to benefit the people who needed it the most -- it did not benefit the township economy and the informal sector, where a lot of people were employed. How was this economic growth going to be directed into the informal sector and into the townships?

She referred to the 440 000 short term jobs reported, and asked what the presidential initiative was about, and which sector was involved? Why not create permanent jobs that would give security and financial stability to the people.

Mr X Qayiso (ANC) commented on the presentation by the FFC on the MTBPS, which had indicated that measures to exercise control should not come at the expense of providing services for the poor. However, the report also stated that during the medium term strategic framework (MTSF) period, the poor would not be protected, especially when it came to grants. Mr Qayiso wanted clarity on the statement in the MTPBS and the focus on the MTSF.

Regarding the non-expenditure or under-spending by departments, this was not good when such serious challenges with water and sanitation in the country continued to linger. There was an urgent need to meet with the departments concerned and receive reports on the reasons for the under-spending.  

On health revitalisation grants, it did seem that the NHI was no longer a priority, given the dilapidated infrastructure of some of the health institutions, and this could cause serious problems in the future.

Mr Z Mlenzana (ANC) referred to the division of revenue, and asked if conditional grants were still conditional, in view of the perpetual under-expenditure, non-reporting tendencies and so on. At what stage should an attempt be made to move a little from the baseline approach to budgeting, and budget according to need?

On the compensation of employees for the wage bill, was there any way in which the number of employees could be determined by the job allocation and performance per employee, so that the number of employees needed could be agreed upon and wage bill managed?

On the management of expenditure in local government, punishing a particular institution by taking back money already allocated was an indirect punishment of the end user, who was the voter. How best could this be addressed in the light of identifying the responsibilities of every party involved, and ensuring that there was proper monitoring of under-expenditure?

Mr Mathafa noted that there had been a delay in the appointment of a professional service provider, and asked for an update on this appointment. How did this affect health services in the Western Cape? There was also a delay in the completion of the Limpopo Academic hospital -- was that delay being given attention and prioritised to ensure that the project was completed timeously, and what did it mean when these funds were moved? Was there no intention of completing the project, and what costing had been done to ensure that whatever was moved did not impact on the project?

On the school infrastructure backlog grant where R210m had been allocated, R97m of that had been reprioritised, leaving a balance of R113m. Why had R210m been allocated, and why was it prudent to lose R97m, and was the remaining R113m enough to ensure that these projects were completed in time? Most of the schools allocated were in the Free State, the Eastern Cape and Limpopo, where these infrastructures were really needed, particularly with regard to sanitation.

The Chairperson asked the Committee support staff to note the issues that mainly referred to under-spending and the transfer of funds. The Committee must write directly to the concerned departments to provide full explanations so that issues were just not raised and not properly addressed.

Ms Hlonyana asked if there was an institution responsible for imposing the structural adjustment on the country, or was it just an initiative of the ANC government?

It was amazing how spending was always reduced where it affected the poor, while the exorbitant salaries earned by Ministers were not cut. The positions of Deputy Ministers were also not necessary. When cutting happened, it should be directed where money was being spent for no reason, and not the most important sectors of the economy, such as the health and education sectors.

Mr Qayiso asked for the Commission’s advice on the departments that were said to be under-spending, and what should happen as far as the FFC was concerned.

Mr Mlenzana asked if the State of the Nation Address (SONA) presented in 2019 was still operative, and what the fiscal consolidation of the President’s injunctions was, particularly in relation to economic renewal and transformation. How did this budget arrangement enable building a developmental state and the advancement of social transformation?

The Chairperson said that there was much emphasis on the impact of the budget cuts, but many departments were unable to spend what was allocated to them. There was a lot of under-spending and shifting of funds, which had a lot of implications in the area of service delivery. What were the reasons -- and not the excuses -- for these under-expenditures, and what should be done about it?

On the economic stimulation needed for local government to generate its own revenue, how could local government enhance its capacity? Reports showed a percentage of the expenditure spent on health and education, but there was no progress in terms of providing good quality.

The FFC had suggested a review of the structure of conditional grants, but had provided no suggestions on what to do.

How easy was it for provinces and local governments to access conditional grants? What informed zero adjustments to local government?

Which grants havd not performed? Why had they not performed, and what was the impact of the under-performance?

Why were departments getting additional allocations when they had under-spent?

FFC's response

Prof Michael Sachs, Deputy Chairperson, FFC, responded on why debt servicing costs continued to grow rapidly over the MTEF. These costs had been the fastest growing item of expenditure for at least ten years, and this growth continues. The fiscal consolidation methods proposed by Treasury did not reduce or propose to reduce debt, and the total amount of debt would keep rising. Government did not generally pay debts. Debts in terms of the cash value would keep rising and would not fall, and the only way the government could address the debt was through growth of the GDP. The MTBPS implied a very substantial fiscal consolidation, especially on the expenditure side, but it did not attempt to achieve a reduction in debt. What it attempts to achieve was to stabilise the increase in debt. The debt service cost was determined by the amount borrowed, and the interest rate paid on the debt. As fiscal crises intensify, the interest payable on debt increases. In the fiscal framework, the assumption is that the interest rate would fall a bit, but it still remains very high and debts continue to increase.

The total revenue that government collects, subtracted by the interest payment, and the non-interest expenditure, gives how much one has borrowed. To stabilise or reduce debt, taxes must be raised or spending reduced. Interest payment on debt was similar to a social grant. For a social grant, government takes cash out of the bank account of tax payers and puts it into the bank account of poor people. For interest payment on debt, cash is taken out of the bank account of tax payers and put into the bank account of creditors, which consists of foreigners, foreign residents, and domestic bond holders, who are the richest South Africans. As debt service costs rise, the amount of the budget allocated to the poor --which is non-interest expenditure -- is crowded out by the amount of expenditure allocated to the affluent/wealthy in the form of interest payments. South Africa’s debt service cost was about 5% of national income. Therefore, the fiscal framework does not reduce the debts, but it hopes to stabilise the increase in debt. While that increase carries on, and while the interest rate on that debt remains extremely high, the budget would become less and less pro-poor in its composition.

From research and analysis, reprioritisation was required, because some money did not need to be allocated for the purposes for which they had been allocated.   

It was said that there would always be money to borrow. People would always continue to lend money, but the problem was the cost. The total debt amount had not moved, but the rate was hiked immediately power changed hands, and that was how the cost of borrowing gets so high and continues to be a burden.

The total allocation for the provinces over the 2022 MTEF was projected to increase by 2%, but with inflation which was currently moving around 5%, there was an 18% to 19% reduction in growth. While there was an overall positive growth in the allocations, the cost of providing services was rising higher than the allocation, and this may lead provinces to start moving away from key essential services. It was therefore important that provinces report to the various provincial legislatures, who would help to manage those reductions and reprioritise resources to support those services which may have suffered the largest impact.

On the conditional grants, the result was the delays in the completion of projects, and a case had been made with respect to the Limpopo Academic Hospital. The nature of the way in which the resources were allocated showed few resources being allocated to critical and important projects, which was also a function of planning and reprioritisation.

On whether conditional grants were still conditional grants, the Commission was currently doing some work on the grants with the aim of ensuring that some of the conditions attached were still benefiting the system as they were originally designed. The result of that work would be presented to Parliament next year in March.

There was a need to allocate resources to capacitate councillors as well as administrations, especially during this transition period. However, in addition to capacitating councillors, there was also a need to capacitate the administrators so as to ensure that the transition is smooth. To make the process more optimal, there should be several interventions from many stakeholders, so there was a need for a well-coordinated intervention process.

The presentation alluded to the fact that over the MTEF, the projection of expenditure for the poor was declining. For example, with the local government equitable share, the overall allocation to local government on the average was said to be declining at a rate of 0.1%. This meant protection of the poor was at risk, and the only instrument that could effectively protect the poor was the local government equitable share, which was about water, sanitation, refuse removal and electricity. Municipalities would therefore need to improve on service delivery.

There were measures that could be explored to protect the poor. Growing local economies could create jobs and was a sustainable way of supporting the poor. Municipalities needed to move away from the traditional way of doing things in order to attract investment, change some of regulations so that it is easy to invest in local areas and stimulate local economic development, and reduce timeframes for approving licences so that small and medium enterprises (SMEs) could thrive in that sector.

Reallocating under-spent funds from some municipalities should be done only as a last resort. If there was under-spending, it should be investigated to see if it was a matter of capacity, and then it must be dealt with. There was also a need for consequence management, which should be the next focus before resorting to a reallocation of resources.

Regarding what informs the zero growth of the local government allocations, it was evident that local government was also now beginning to carry a disproportionate budget of the fiscal consolidation process. This was actually leading to poor performance outcomes, especially on the part of the local governments. Sometimes it was the assumption of government that the local government also had its own revenue, and so reductions could be made. However, the Commission was very concerned about this, as represented in the presentation.

Responding on what was driving under-spending of the public transport network grant, the poor performance of this grant had been consistently raised. Last year it had been reduced by R1.3bn and only six of the 13 cities receiving the grant had successfully launched public transport systems. This time it was due to delays in implementing the My Citi phase 2A extension project in the City of Cape Town. Clearly there was a need to see what was really happening with the rolling out of these infrastructure projects, because it resulted in the inefficient use of those funds.

The three largest allocations were to National Treasury, for the public employment programme; to the Department of Trade, Industry and Competition, for the Industrial Development Corporation (IDC) to support economic activities in communities; and to the Department of Agriculture, Land Reform and Rural Development, for the livelihood programme that they were working on.

Response by PBO

Dr Jantjies said that employment and economic growth were remarkable economic questions and issues that had to be addressed. The Minister of Finance had been part of the discussions earlier in the month, where he had acknowledged the need to transform the economic sector to provide more support throughout all the sectors.

Government had indicated that it had not achieved its target in terms of getting skilled managers in the public sector. About 70% or 80% of municipalities had hired consultants due to the lack of skills or capacity. This created a greater problem because in many of these instances, many of the consultants were unable to address issues of service delivery adequately.

Only about 15% of the current expenditure budget framework was not based on the zero-based budgeting principle. About 80% of the consolidated expenditure was based on the principle of zero-based budgeting. Certainly, the issues around efficiency come into play, but social spending had been shown to far outweigh several methods of dealing with poverty and other socio-economic challenges better and more quickly in the short term.

The analysis of conditional grants and expenditure had focused on the technical side and the performance. There was not enough information available to do a proper analysis of the progress within the grants, but the information/data was derived from the division of revenue. However, there was no good reporting on the grants, as not all provinces were reporting the same way and there was a lot of duplication of the grants. There was need to review the structure of the grants and determine if all the grants were still funding the priorities of the government.

Regarding the NHI grant, the indirect portion of the NHI had always been under-spent. This was the reason for the shift of the purpose of that grant, to fund other grants that were more defined.

There had also been a lot of discussion about under-spending, and those departments under-spending would be invited to determine whether their rollovers should be approved.

Short term jobs created a lot of issues over whether those funds were part of the base line of the departments, and the effects of employing people and letting them go. However, previously they were mainly Expanded Public Works Programme (EPWP) jobs, which were really short-term jobs, but were currently longer term jobs. Also, while reviewing the unit cost per allocation to departments, it was evident that the unit cost from last year to this year had shown a huge variation, which indicated that there were totally different jobs that they wanted to create or support this year. It was the Committee’s decision as to whether it would approve additional funds for these departments.

Departments did not really base their estimates of COE on the organisation’s structure. Research had been done on whether government had a handle on COE, but the result of this research was not available. Treasury, however, had tools that they provide departments -- special work books to calculate the COE -- but there was no evidence that those tools were being used.

There was need to investigate the root cause of this under-spending. Lately, national departments had tried to provide incentives to municipalities or provincial departments to persuade them to spend -- but was that the best approach to this problem, or should they fix the real problem?

On capacity and skills specifically in municipalities, efficiency needed to be reviewed, but one of the answers from National Treasury was what could be done with all those CFOs if departments were consolidated or if smaller entities were brought into departments as a programme.

Under-spending and inefficient spending had a strong impact on poverty, unemployment and inequality, which may be underestimated within South Africa. A look at the International Monetary Fund (IMF), the World Bank and the Organisation for Economic Cooperation and Development (OECD) all showed that inequality was bad for growth and made government spending less efficient and ineffective. This was evident both on the supply side from government and service providers, and also from the demand side of the learners, and the levels of poverty and struggling, poor infrastructure, poor services, and also having children with no food to eat. There was the need to focus on the systemic causes and not only specific inefficiencies within local governments and government departments.

The government debt and financial situation was all about growth and interest rates. From a macro-economic perspective, one could think of the government as having one account and the private sector as having another account, and one needed to see the two as integrated and not as separate, with what happens in either account affecting the other. Issues of growth and interest rates were really important, because government was a driver of growth and could be a driver of innovation. It was therefore really important to see social expenditures -- particularly social grants -- as one of the most effective ways of dealing with inequality and unemployment by providing them with livelihoods and reducing the levels of poverty and also reducing inequality. There had not been any programme in government that had been as effective. Some of the evidence for this was the Green Paper from the Department on comprehensive social security.

The interest rate was a given, and there was nothing they could do about it. Central banks around the world, especially in developed countries, were in better positions because they were from rich nations with more demand for their money. There was an international hierarchy of currencies. There was need to discuss and understand how global financial markets work, and the role of governments and central banks in actually addressing interest rates.

Response by National Treasury

Dr Mampho Modise, Deputy Director General: Public Finance, National Treasury, said the biggest expenditures that Treasury funded were the compensation of employees, and the rollout of vaccines by the Department of Health. At the time of the budget, the contingency reserve was increased to R12bn to deal with some of the costs that would arise from the vaccine rollout. Funding of about R2.8bn was also allocated for the rollovers. The significant departments were the Department of Home Affairs for the issuance of passports and identity documents (IDs), and also the Department of Defence for the peace-keeping mission in the DRC. Some of the money that was partially used to fund this had been the contingency reserve. The provisional allocation was the money that was announced at the budget for the youth employment initiative. The money was allocated to the Department of Basic Education, National Treasury, and the Departments of Trade, Industry and Competition; Women, Youths and Persons with Disabilities; Social Development; Health, Tourism and other departments, amounting to between R10 billion and R11 billion. The details were found in the Adjusted Estimates of National Expenditure (AENE) and in the Adjusted Appropriation Bill.

The Chairperson asked about the status of the Vaal River issue. This was a project that had been there for a long time. It did not seem to be solved, and the money was not being used.

Ms Modise responded that the Vaal River issue was complicated. There was a time when the Defence Force had been asked to intervene, and they had, but the problem of vandalism had persisted. The Department had taken over the project, but they were struggling to finish it. It would be best if the Department was invited to explain what measures they had put in place and how they intended to deal with the vandalisation of the infrastructure.

The Chairperson asked the Committee support staff to prepare a letter to the Department of Water and Sanitation to provide an explanation on the Vaal River project, and how they intended to finalise the project.

The FFC and PBO needed to identify the grants which were under-performing, the reason why that was happening and the suggested solutions, so that the Committee could see how to complete some of these projects. Once the work was done, the Committee should be notified for an inspection.

The FFC and PBO confirmed that they would consider this and give an input by budget time.

Committee’s revised Term 4 programme

Mr Mlenzana moved the adoption of the Committee's revised fourth term programme.

Mr Mathafa seconded the proposal.

The programme was adopted.

Adoption of minutes

The minutes of Committee meetings held on 15, 17 and 21 September, and 16 and 17 November 2021, were adopted.

Chairperson’s closing remarks

The Chairperson said it would not help the Committee to continuously raise troubling issues without following through to finalisation. It would write the departments on the question of under-spending, and ask for an explanation as to what they were doing about it. The implication of under-spending both economically and socially was grievous. Money in the bank did not create jobs. South Africa borrowed money, but still did not use it. After writing to those departments, the Committee should also write to the respective committees to follow up.

Mr Mathafa said that when it wrote to the departments, the Committee should be clear on what it wanted them to respond to.

Mr Qayiso added that when writing the departments, the element of perpetuity should also be referred to.

The Chairperson confirmed the Committee would write the departments and inform them that it was noticing a trend and needed an explanation for the issues raised.

The meeting was adjourned.