The Select Committee on Appropriations met in a virtual meeting with the Select Committee on Finance to receive a presentation from the Financial and Fiscal Commission (FFC) and Parliamentary Budget Office (PBO) on the Division of Revenue Bill.
The FFC gave its views on the fiscal framework, the 2022 Division of Revenue Bill and the 2022 Appropriation Bill, and presented their thoughts on balancing economic and social recovery with ensuring sustainable public finances, especially at the provincial and local levels of government. It supported the 2022 budget and the government’s continuous commitment to consolidating public finances while providing support for the pandemic response, job creation and social protection.
Regarding South Africa’s growth prospects, the FFC held the view that it was improbable that the economy would return to pre-pandemic production levels within a year. It supported the government’s approach of broadening the tax base, improving administration and lowering tax rates.
The PBO encouraged national departments to monitor information on financial and non-financial performance of programmes partially or fully funded by an allocation made by the Division of Revenue Act (DoRA). It said that the mandates of the different spheres of government were addressed by DoRA by considering the demographic social and economic needs of the environment. Changes were made to the medium-term economic framework to facilitate funding for capacity, service delivery and economic growth needs.
Members expressed concerns surrounding several issues raised in the presentations. Prevalent issues included matters such as the impact of the Ukraine invasion of Russia on inflation rates of core spending items, the effects of a zero-based budgeting approach, the increase in the equitable share allocation provided to local governments, and discussions on money bills in the Houses of Parliament.
FFC Submission on 2022 Budget: Division of Revenue Bill
Dr Nombeko Mbava, Chairperson, FFC, introduced the FFC’s views on the fiscal framework, 2022 Division of Revenue Bill (DoRB) and the 2022 Appropriation Bill. The 2022 DoRB was investigated at the provincial and local government levels. The FFC presented its thoughts on balancing economic and social recovery with ensuring sustainable public finances.
Mr Chen Tseng, Director: Research, FFC, reminded the Committee that in the 2022/23 DoRB it was concluded that it was improbable that the economy would return to pre-pandemic productivity levels in the short term. This was attributed to the standing and emerging risks related to supply and demand on the economy internationally and domestically.
The effects of escalating inflation and unemployment structurally depreciated and eliminated, respectively, the purchasing power of households. Economic growth had been hindered due to COVID and civil unrest, resulting in the gross domestic product (GDP) being at the same figure it was in 2017. Factors such as electricity, water and gas continued to limit economic growth in the country.
Mr Tseng reported that the fourth quarter GDP was down by 3.4%, with productivity hampered by infrastructural problems.
Fiscal Framework and Revenue Proposals
Mr Siyanda Jonas, Researcher: Local Government Analysis, FFC, said there would be a consolidated budget deficit of 6% of GDP for 2022/23, while 2023/24 would see a narrowing towards 4.2%. Worryingly, debt servicing costs would exceed R300 billion per year from 2022/23. The rise in inflation would lead to a rise in interest costs incurred by government. To compensate for this, government would have to raise tax revenues, cash spending or credibly promise to do so in the future. Pressure was expected to increase on public spending, as there was a small tax base due to rising unemployment rates.
Over the medium term expenditure framework (MTEF), capital payments would grow at an average of 12.2%. Capital transfers were growing at a rate of 7.2%. Mr Jonas expressed concern over the rising employee compensation, which was growing at 1.8% over the MTEF.
On allocations by function of classification, the FFC noted that most functions were decreasing over the MTEF, notably with learning and culture decreasing by 1.1% and social development decreasing by 2.5%. Community and economic developments were the only sectors to increase over the MTEF.
The FFC said that there would be no immediate tax increases in the year, though gross tax revenue for 2021/22 had been above what was projected. The FFC recommended further investigation into other factors be considered to ensure that the decrease in taxes resulted in investments.
Ms Sasha Peters, Programme Manager: National Appropriations, FFC, said that the Appropriations Bill would allocate R1 trillion in 2022/23, which was an increase of 3% compared to the revised estimate of 2021/22. The positive growth of 2022/23 would see a decline of 4% in 2023/24.
Ms Peters said that the biggest funding allocation was attributed to social development, at R257 billion. The three key developments that drove increases in the social development vote were the extension of the Social Relief of Distress (SRD) grant until 2022/23 at a cost of R44 billion, extension of the Child Support Grant (CSG) for double orphans until 2023/24, and social security grants linked to inflation. The Commission was in the process of looking for a sustainable, permanent replacement for the SRD grant.
The FFC reported that the Department of Higher Education and Training's (DHET's) increase to R110 billion in 2022/23 included an additional R32.6 billion transferred to the National Student Financial Aid Scheme (NSFAS). The FFC was awaiting the new higher education funding model that would be introduced in 2023. Basic education would see nominal increases at the provincial level over the next three years, some of which would be allocated to the hiring of teachers. Cooperative governance would have increased funding of R28.9 billion through the equitable share allocations in municipalities.
On infrastructure development, water and sanitation would receive R5.3 billion over the MTEF for projects on water resources and regional bulk infrastructure. Transport would receive R81.6 billion in 2024/25, a large portion of which would be transferred to the South African National Roads Agency (Sanral) for upgrading, strengthening and refurbishing of national non-toll roads.
The FFC supported the government’s decision to prioritise social protection and economic development, though stressed the temporary nature of the funding. It advised that departments should create contingency plans to fund commitments should the need arise. It was stressed that the new higher education model be finalised in time for the 2023 financial year.
Division of Revenue Bill – provinces
Mr Eddie Rakabe, Programme Manager: Division of Revenue – provinces, FFC, noted stagnation in provincial allocations and the alignment and reprioritisation of conditional grants with the overall long-term development goals of the country. The FFC said there would be a R2 trillion allocation over the MTEF to the provincial fiscal framework.
The FFC noted an improvement in conditional grant allocations by catching up to pre-COVID-19 levels, though at a declining rate. This had resulted in cuts to services provided by the provinces, including letting go of teachers and shortages in teacher-learner support material. To combat this, R53 billion had been allocated to hire teachers and acquire materials.
The FFC recommended that the provinces identify selected delivery indicators and provide assessments of service levels using the 2020 financial year as a point of reference to determine the impact of stagnant allocations on service delivery. The assessments must also incorporate the provincial conditional grant delivery targets established in the 2020 Division of Revenue Act (DoRA).
The Human Settlements Development Grant (HSDG) saw a significant decrease in allocation, further delaying housing backlogs and improved housing conditions. Mr Rakabe compared this to other areas like agriculture, which despite receiving low allocations, had managed to yield high job creation levels. The FFC emphasised that going forward, this alignment must be improved between the long term objectives and allocations provided through conditional grants.
The HIV/AIDS, tuberculosis (TB), malaria and community outreach grants showed significant growth over the MTEF and would increase by R1.3 billion in 2022/23. The new grants were allocated to prioritise the shift from curing to preventative measures.
2022 Division of Revenue Bill – local government
Mr Tseng commented that the political and economic shift that had occurred over the past year had impacted the delivery of basic services. COVID-19 had created fiscal challenges in terms of reprioritisation of funds and the incurring of over-expenditure to add resources to local governments.
The FFC welcomed the local government capacity-building system to be kick-started in 2023. It was felt that the initiative would enhance municipal performance at the ground level. The FFC also welcomed local government strengthening their own revenues through development charges.
An increase in the local government equitable share was projected over the MTEF. A key concern of the implementation by local governments had been under-spending. A rise in local government transfers over the equitable share was noted, but concern was expressed over the conditional grants, as the funds were predominantly aimed toward basic infrastructure while other projects suffered.
The FFC noted stagnation in the growth of local government grant allocations and under-spending of grants. It welcomed the government’s efforts to keep local governments' equitable share growth above inflation to offset the increasing costs of basic services. Capacity-building systems and infrastructure grants were welcomed. Local governments must align all initiatives for economic growth and development with the District Development Model (DDM). The Commission recommended a review and improvement of expenditure review programmes, and have the budgets adjusted accordingly.
Balancing recovery and fiscal sustainability
The FFC felt government could learn from the three-pronged approach used in response to the COVID-19 pandemic.
Dr Mbava said that the Commission supported the 2022 budget and the government’s continuous commitment to consolidating public finances while providing support for the pandemic response, job creation and social protection. In terms of South Africa’s growth prospects, the FFC held the view that it was improbable the economy would return to pre-pandemic production levels within a year. Regarding revenue and tax policy, the Commission supported government’s approach of broadening the tax base, improving administration and lowering tax rates.
The Commission welcomed government's decision to use a portion of the revenue windfall to lower the gross borrowing requirements and reduce debt instances. The FFC noted that debt stabilisation risks remained elevated and posed significant challenges to public finances. The Commission supported the decision to use the revenue windfall to improve pro-poor and growth-inducing allocations in non-interest spending over the MTEF.
PBO brief on 2022 Division of Revenue Bill
Dr Dumisani Jantjies, Director, PBO, introduced the presentation, stating that it was focused mainly on traditional revenue. He hoped the PBO would be afforded the opportunity to return to Parliament for a meeting on the Appropriations Bill. The presentation was aimed at sharing some of the societal and economic needs that the DoRA was meant to support while looking at changes made in local and provincial government in previous years.
The Act considered how revenue raised nationally was divided amongst the three spheres. It also looked at equitable shares and conditional grants allocated to provinces to ensure that basic services were available. It was noted that allocations had increased in local government when compared to prior years.
Ms Busi Sibeko, PBO Financial Analyst, said that the provisioning of social protection, safety and security constituted the largest expenditure functions of national government. This included income protection, social welfare and supporting women, youth and people with disability, who were greatly affected by gender-based violence and femicide (GBVF). 18 million South Africans received some form of a social grant. The PBO expressed concern surrounding corruption in the public and private sectors.
In the provincial sphere, education and health formed the largest expenditure functions. The PBO noted over three million children between the ages of 0 and 4 accessed Early Childhood Development (ECD) services. This almost reached the 3.6 million target set to be achieved by 2024. On health, life expectancy (LE) had increased, while the infant and children under-5 mortality rates had seen regression. The PBO recommended that the driving factors into these fluctuations be analysed.
Mr Tshepo Moloi, Economic Analyst, PBO, referring to local government, said that between 2004 and 2016 a rapid rise was observed in service delivery protests, disproportionately affecting poor households. COVID-19 circumstances had also required greater reproductive labour for women within households, hindering their participation in labour markets.
The Non-Fiscal Census of Municipalities (NFCM) 2019 report indicated a decline in the provision of free basic services, such as water, sanitation and electricity. The Public Affairs Research Institute reported that for the past two decades, government had been unable to balance ensuring service delivery while considering financial viability, resulting in millions of people unable to access these services due to a failed system. Financial and operational challenges related to service delivery were often correlated.
(See presentation for challenges to service delivery)
Division of Revenue in context
Mr Rashaad Amra, Economic Analyst, PBO, said there had been a declining share of provincial and national government division of revenue since 2008/9, while local government allocations had risen. This created concerns over the adequacy and implications for the intergovernmental system over the MTEF.
The PBO noted that debt servicing costs had almost doubled since 2008/9, and national and provincial government allocations had decreased for this growth to have occurred. Allocations per capita had increased over the MTEF, though the majority of the increase was for debt servicing costs. He projected that over the MTEF the main budget expenditure on a per capita basis was expected to decrease.
Significant decreases were noted on a per capita basis for national and provincial government. The PBO expressed concern regarding the appropriateness of the division of revenue for the country, given the rising debt servicing costs and the government's continued attempt to stabilise debt as a share of GDP over the MTEF.
Funding structures of the different spheres of government
Dr Nelia Orlandi, Deputy Director, PBO, said the national share constituted 67.2% of the main budget for conditional grants, fuel levies and debt servicing costs, while the provincial and local shares made up 28.4% and 4.4% respectively. 69% of the national sphere was transferred to other spheres of government and institutions, including cooperative government, social development and human settlements, which all transferred over 50% of their national allocation.
Over the MTEF, provincial equitable shares included funding to address shortages of teachers and learner support material, COVID-19 responses, school assistance and social welfare, and to help fund the costs of the non-pensionable cash gratuity for employees. MTEF allocations to conditional grants included funding medical interns and community service doctors, adding to the district health programmes grant and to the human settlements development grant to rehabilitate houses.
The biggest provincial conditional grant allocation was R1.3 billion for the district health programmes grant. In terms of local government transfers, changes had been made to the allocations, including a R1.2 billion increase to the municipal infrastructure grant. The local government equitable share had been increased in the 2021 MTEF, but public transport network grant allocations had decreased.
In summary, though the 2022 budget had increased the local government equitable share by 10.3% annually, it did not reflect that the basic needs of poor households would be met. The majority of local government revenue was raised by municipalities themselves, with poor rural municipalities relying mainly on transfers as revenue.
Monitoring performance on service delivery
The Department of Planning, Monitoring and Evaluation (DPME) monitored the annual performance plans through quarterly progress reporting, excluding input on the division of revenue. There was little monitoring of performance outputs of conditional grants, only expenditure. It was yet to be included in the standard systems provided for in the Public Finance Management Act (PFMA).
National departments had to monitor information on the financial and non-financial performance of programmes partially or fully funded by an allocation in the DoRA. The Comprehensive Agriculture Support Programme (CASP) indicated performance on expenditure and performance on outputs in specific provinces.
(See presentation for 'Understanding Conditional Grants: Public Transport Network Grant')
The PBO encouraged national departments to monitor information on the financial and non-financial performance of programmes partially or fully funded by an allocation made by the DoRA. It was said that the mandates of the different spheres of government were addressed by DoRA, taking into consideration the demographic social and economic needs of the environment. Changes were made to the MTEF to facilitate funding for capacity, service delivery and economic growth needs.
Mr S Du Toit (FF+, North West) asked for the opinions of the PBO and the FFC on the effects of the Russian war and the possibility of fuel increases and the way forward on these matters. On provincial underspending, he was surprised to see North West underspending again on agricultural grants. This had occurred despite some of the grants in previous years being used to tend to other needs than what they were provided for.
Mr Du Toit asked the FFC and PBO what their expectations would be for the year to come. He said certain issues, like job losses, increased rates and more people relying on municipal and national grants, were expected.
On funds allocated to the National Student Financial Aid Scheme (NSFAS), he commented that a large allocation was given to tertiary education, regardless of the high dropout rates. Were the FFC and PBO of the opinion that more funds should be allocated to the Department of Basic Education (DBE) than Higher Education, to ensure that children received the necessary education? He pointed out that Basic Education had had to lose roughly 30% of the syllabus in the past two years.
Mr S Aucamp (DA, Northern Cape) asked for an opinion from the two entities on the effect of the Russian and Ukrainian war and the cost increases for South Africa that were expected. He noted the escalating costs of fuel that could reach up to R30 or R40 per litre. This would result in municipalities having a higher expenditure on these items. It would also impact entities such as Eskom which was reliant on diesel to supply the country with electricity, possibly resulting in increased load-shedding. This could result in cost increases for municipalities, where money had not been allocated for this. He asked what could be done to alleviate this problem.
He commented that there was no form of relief or increased allocations for industries reliant on fuel, such as the agricultural and manufacturing sectors. This would have a knock-on effect on unemployment and food security in the country. He asked what could be done to assist municipalities in this regard.
Mr D Ryder (DA, Gauteng) asked about the impact of inflation, saying this was inevitable in the short term considering the economic stimulus packages that had been implemented around the world. He also expressed concern over the impact of the Russian war.
An important takeaway from the FFC presentation was that many increases were below inflation, or in line with them resulting in no growth. He reiterated the sentiments of National Treasury (NT) and comments in a previous meeting, where it had been emphasised that there should not be an overreliance on allocation analysis and a move away from incrementalism. He felt that reprioritisation should take place within every department’s spending, and had noticed that the presentation focused greatly on incrementalism.
He asked the FFC what they had seen happening in terms of zero-based budgeting, whether investigations have been conducted on allocations to projects, and if any benefits had been noted from the pilot project of zero-based budgeting so far. He said that the Housing Department had indicated that there would be a move away from top structures and towards providing site and service packages and serviced stands so that they could continue to develop on their own.
Mr Ryder said that the FFC presentation did not focus strongly on infrastructure spending. He felt that local government’s spending on infrastructure investment was reducing, which was concerning because the economic recovery plan mandated an infrastructure-led recovery.
On unspent and returning funds, he highlighted the need for the Auditor General (AG) to present to the Committee more quickly following the financial year to evaluate where there was under-spending or unspent funds returned to NT.
Inflation-linked to the equitable share was concerning, as input costs were rising faster than inflation rates. North West province was roughly 9% above inflation, looking at the water boards and Eskom. He said any increase below 11% would just put municipalities in difficult positions considering rises in population and urbanisation.
Mr Ryder appreciated the thoroughness of the PBO presentation.
Mr M Moletsane (EFF, Free State) noted from the PBO presentation that for the past two decades local government had been unable to fulfil their conflicting objectives, and their financial viability had suffered. He took into consideration that local government was the first line of interaction between citizens and the government. He asked whether the distribution model was still relevant in resolving the challenges of local government, which had been allocated around 9.1% of the budget.
Mr M Saziwa (ANC, Eastern Cape Legislature) referred to the FFC presentation and asked what proposals had been put forward to address the challenge of financial inefficiencies regarding the performance of state-owned enterprises (SOEs). He asked whether there had been a rationalisation of some of these SOEs or a change in their business models. If these changes were made, he asked what the reaction of government and National Treasury (NT) had been.
Mr Saziwa noted that the ballooning expenditure on the compensation of employees was similar to the 1996 national framework agreement. He asked the FFC if the rate of ballooning increases was monitored on a cellular level in phase management, and what the way forward would be.
An allocation in the current budget had been given to the DBE to hire more educators. The education sector had suffered numerous infrastructure challenges hindering the provision of safe, quality schooling. He asked whether there had been increases in the education infrastructure grant to offset these challenges.
He said many poor municipalities had low revenue generation prospects. Did the FFC feel that a blanket approach could not be taken in municipalities greatly affected by provinces?
Referring to the PBO presentation, he said that Money Bills and Related Matters had been passed and that when the process of rollout began the PBO must be involved with NT and all related departments. He felt the Committee’s oversight over Parliament and legislatures allowed them to determine their budget. He noted an issue where the PBO was responsible for a department while also being expected to conduct oversight over it. He asked whether national insurance had been allocated to the budget of health nationally and if there had been a focus on developing parliamentary care as a way of rebutting matters that had become a burden on departments.
Co-Chairperson Mahlangu appreciated Mr Saziwa’s comments but felt that other committees such as the Joint Committee on Financial Management of Parliament should get involved in these issues.
Mr Z Mkiva (ANC, Eastern Cape) asked if a percentage could be provided indicating how much was allocated from the national fiscus to rural infrastructure development. He explained that this was on the basis of there being a large infrastructure backlog in rural communities.
He said they were in a state of dire financial constraints as a result of the outbreak of COVID, which had led to an increase in borrowing funds and expenditure. This meant that income was often allocated to interest repayments. He asked the FFC and PBO if the financial projections were met, what could be done to deal with the situation differently. He feared the financial position could be partially attributed to complacency when dealing with financial accounts.
Referring to the impact of the Russian war on fuel prices, he asked why South Africa was not exploring options such as a bilateral agreement with Venezuela, given the fact that in 2008 South Africa had been offered a greenfield opportunity to purchase cheaper crude oil. That would help to mitigate challenges such as resourcing Eskom’s fuel consumption.
Co-Chairperson Carrim found it interesting that the FFC supported the decision to put more funds into poor projects and financing aspects of economic growth, though they acknowledged that the approach would not jeopardise deficit reduction and fiscal consolidation. He felt that this made them appear more neutral and informed on the matter.
He asked for clarity on what was meant in saying that most significant structural reforms focused on artisanal skills to address unemployment. He asked if work had been done on a substitute for the social relief of distress (SRD) grant and if so, the Committee could be briefed on this.
On the consequences of the war in Ukraine, he acknowledged that the PBO and FFC reported that coal export prices would increase, as well as other revenue. He asked whether any other positives were expected in this regard.
Co-Chairperson Mahlangu said, as per the call from the President in the State of the Nation Address (SONA), that the priority of government was to improve the economy. She asked what specific steps had to be taken by government to ensure economic growth returned to pre-pandemic levels. This would enable the Committee to facilitate their advisory role.
She asked what impact the current local government allocations would have on financially stressed municipalities with unfunded mandates or debt. She asked if a positive impact was expected to aid the beneficiaries.
Co-Chairperson Mahlangu asked for opinions on the school backlog grant shifting to the education infrastructure grant. Could they substantiate why it would be beneficial or not? She asked the PBO and FFC what would be done to ensure debt was being stabilised in the country.
Mr Tseng reminded the Committee of the 2021/22 FFC submission, where issues of inflation trends were noted due to the impact of COVID-19. Upon further analysis and distinguishing between core and non-core inflation, it had been observed that the core items were more expensive than the non-core items. This had been a concern then and now, given the current volatility of inflation and global factors.
On the Russian war, the FFC said South Africa's debt redemption schedule required most of the funds to be paid in U.S dollars. There was an obligation to maintain this relationship with the west, although most important goods, such as machinery, were sourced from the east. The Commission remained neutral regarding the conflict. This was somewhat unfortunate, as it indicated that South Africa was not in a position to take on a more self-reliant economic position.
The FFC said that financing for infrastructure was spent in different spheres for different purposes. In a meeting the week before with the Standing Committee on Appropriations, it had indicated that national budgets contributed largely to the administrative building, while in provinces and local governments, budgets went mostly towards social and basic services respectively. Spending on roads was allocated a budget in all three spheres of government. Mr Tseng warned against aggregating these factors up to look at the cumulative infrastructure spending. He explained that these budgets were utilised by entities to build the infrastructure. Investment did not directly correlate with whether the aggregate number increased, making it complex when analysing.
The FFC said that money from the Human Settlements Development Grant (HSDG) was used to circle between national, provincial and local government in terms of spending and using cash residuals. Money would accumulate between the three spheres due to different financial years and reporting issues and was dependent on when the houses were actually built. Due to watching these residuals circulate throughout the government over the years, it had been decided to introduce a reduction for that money to be spent in better places.
Zero-based budgeting within government referred to carrying funds from the side of revenue to the budget. The FFC explained that budgeting was done from an expenditure side, with an emphasis on budgeting with what was available rather than what could be spent on a matter, which often involved borrowing to a degree.
Mr Tseng agreed with Mr Mkiva that this great crisis had also opened up great opportunities. A relationship could be fostered with Venezuela, though it would also have to consider what else was gained through international relations. The FFC felt that South Africa should be able to challenge its relationships with rating agencies due to their longstanding junk status. He said this was unfair, as South Africa was worse off than a country in conflict.
The FFC said labour rigidities and structural reforms regarding Eskom had been discussed for years. It had highlighted in its annual submission limiting factors, such as the dynamic response in household behaviour to this grant, the fiscal implications, and the implementation limitations. These limitations were yet to be modelled, and had contributed to the position taken by the FFC.
On the reprioritisation of funds, the FFC said that South Africa did have available funding due to the tax revenue sitting at 25% of the GDP and through historically being an efficient government, which had recently and rapidly declined. According to the AGSA’s last audit, there had been R177 billion in wasteful expenditure and R2 million in fruitless expenditure, excluding residuals sitting within government accounts. These funds should all be contributing towards getting value for money spent in other areas.
Dr Jantjies said that they would issue an economic brief later which would highlight the early signs and implications of the Russian war on South Africa's macroeconomy. Although this was still a moving target, they were still indicative of where an impact would be felt on public finances.
Two weeks previously, the wheat price had increased by 60%. He highlighted that in the fiscal framework, the PBO had highlighted the potential gains if Russian sanctions continued, as the South African mining industry could expect more increases in exports. Increasing exports would lead to increasing the tax base of the economy.
Dr Jantjies urged a shift towards focusing on the fiscal climate outcomes of spending from the budget as a whole in an analysis to establish the needs of the economy which were to be addressed by some of the allocations. He felt it was important that the government work within these boundaries when realising mandates from the Constitution and National Development Plan.
In the fiscal discussion, it was stated that 60% was allocated to social security. The PBO emphasised that ten million households were dependent on allocations, though the money covered only three million. At times funds were redirected to where they were needed, resulting in periods when basic needs were delayed. Local and provincial governments understood the impact of redirecting funds, especially in terms of oversight.
Dr Jantjies said he had looked into the South African macroeconomy on performance outcomes annually from 1994 to 2019 on the role of government. He highlighted the period between 2004 and 2008 when the country had seen growth of 4.8% in the economy, with growth per capita at 3.5%. Other notable trends included an increase in employment by 8.4 million, unemployment reduced by three million, and interest rates dropping. At the time, government had placed an emphasis on public investment, partially through public corporations, to stimulate the economy and job creation.
The PBO held that all public spheres had a role to play in pushing public investment in the economy. When an understanding was formed of the importance of having a transformational structural economy, economic growth would occur.
He agreed that money bills afforded the legislative power to determine sector allocations. This matter had been spoken about in Parliament as well. On national health insurance, an analysis had been done and a report would be provided at a later point.
Dr Seeraj Mohamed, Deputy Director: Economics, PBO, said that South Africa had come through a period of global uncertainty, including the 2008 global economic crisis, COVID-19 and the Russian war, and was now facing increasing risks. In the previous medium term budget policy statement (MTBPS), an emphasis had been placed on understanding the geopolitical, environmental and financial risks. He attributed the current economic status to a response to those factors.
On a macroeconomic level, the PBO had highlighted the increased role that the financial sector and financial markets played within the global economy, and how interrelated they all were. Western responses to the Russian invasion of Ukraine included sanctions, denying use of the Swift system and cutting them off from the reserves in other countries.
South Africa had food security at a national level but was deficient at the household level, where one could feel the effect of inflation on food prices. The government had to ensure that certain increases were not passed on to households, particularly poor ones, or work to offset the impact of the inflation.
The PBO reported that 11% of South Africa’s fertilisers were imported from Russia. The World Bank and the International Monetary Fund (IMF) had stated that there was a correlation between global fertiliser, grain and oil prices. When prices were increased, they had global effects. Dr Mohamed said that this should be considered when thinking of interest rates in relation to inflation, as well as whether the demand was driven by internal or external factors. South Africa had observed significant increases in fertiliser costs since 2021. Something that had come to the aid of the country was the exchange rates between the rouble and the rand. The PBO acknowledged that Russia had appeared to be open to negotiations. Due to this, it would be difficult to assess how long the war would last or what the impact could be on oil and gas prices.
Inflation would be seen in South Africa, though it must be managed. This included the costs of education, health, housing and food. The pandemic worsened price increases on account of the affects on supply chains and understaffing. Large corporations in industries such as food and oil had increased their prices using inflation as an excuse to combat declining sales during the pandemic.
Using the United States of America as an example, he said increases in car and house costs during the period of the pandemic, when government stimulus grants were issued, had now settled down in the value chains. Governments had also intervened more by managing rent and housing prices, which had an effect on reducing inflation.
The PBO urged that trends such as this be observed, and advised that different products at different prices be considered, rather than getting concerned over the total rise in social security costs. The GDP may go down this year due to the war and the impact it had on pricing and value chains. It was yet to be known what the severity would be.
Ms Orlandi said the PBO appreciated the shift away from incrementalism used when determining budgets for the following year. Expenditure and performance must be the requirements for the next year’s budget, before adding the estimated consumer price index (CPI) in the medium term. Increases of 2% and 6% had been observed from 2021 to 2022 due to certain grants not performing financially, or in terms of outputs.
The PBO confirmed that infrastructure spending in rural areas would be possible, based on an analysis of the available data. Due to the overwhelming amount, it encouraged the provinces and municipalities in question to be identified to draw that information from the database.
The PBO said that provincial treasuries played a large role concerning local government departments and in the implementation of the PFMA. Provincial treasuries had to ensure that budgets were credible and that allocations from the provinces and national departments did not lose their identity in those budgets, and had to play their role in monitoring. Provincial governments and treasuries must report back and provide analysis on their providing and monitoring of budgets to the Committee.
On the two education infrastructure grants being combined, Ms Orlandi said she supported the simplification of the grant system to alleviate issues like overlapping grants that caused administrative issues in provincial departments and local governments. She said that the PBO received reports solely on expenditure, rather than performance.
The Co-Chairperson said the Committee appreciated the presentations and guidance from the FFC and PBO.
The Committee's minutes of 9 March were adopted.
The meeting was adjourned.
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