The Select Committee on Appropriations met on a virtual platform to receive briefings from the Financial and Fiscal Commission (FFC) and the Parliamentary Budget Office (PBO) on their assessments of the 2022 Appropriation Bill and the Second Adjustments Appropriation Bill.
The FFC said it supports government’s decision to prioritise funding for social protection alongside increases for key votes within the economic development cluster. The 2022 budget placed stronger emphasis on a people-centred or social recovery by allocating over R1.1 trillion, providing consumption and investment boost and retaining economic function expenditure.
The Commission recommends that government should assess the SOEs to appraise their profitable feasibility, operational efficiency, track record in resolving market failures, and attaining developmental goals. The Commission recommends that government should homogenise the legislative framework for SOEs to remove legal ambiguity, reinforce implementation, and improve disclosure and reporting requirements. The Commission recommends that government implement the necessary operational, governance and financial reforms to enable SOEs to effectively and efficiently deliver infrastructure to realise return to investment.
The PBO said Social Protection and Safety and security are the two largest expenditure functions of the national sphere of government. Since the 2022 appropriation was proposed, outlook for the global and SA economy has deteriorated. Domestically, several constraints add additional downward pressure to key macroeconomic variables, such as inequality, unemployment, inflation and growth. Risks for the 2022 appropriation include contingent liabilities, support for SOEs, sustainability indicators and the high unauthorised expenditure and AGSA calls for action on accountability for the use of public finances.
During discussion, Members enquired about the fiscal implications of the Congress of South African Trade Unions' (COSATU’s) ten percent increase demand for its members, the R500 million for the Covid vaccine programme, and the turnaround strategies for state-owned entities (SOEs) to restore financial and leadership stability in those SOEs.
They raised concerns over the relatively much smaller increase in the medium term expenditure framework (MTEF) allocation for basic education, government’s lack of planning for extreme disasters, signs of distress showing amongst small SOEs, and the overdrafts of government departments, which should be illegal. Members were particularly concerned about the huge debt service costs which government would be required to pay and sought advice on its options to deal with this matter.
The Committee was interested in hearing the views of the FFC and PBO on the much-discussed social relief of distress (SRD) grant extension and the proposal of a universal basic income grant (BIG).
Members sought clarity on how the promises made by the President during the State of the Nation Address (SONA) were being translated into key performance indicators (KPIs) by government departments and the actual budgets for the programmes. The PBO was specifically asked to give more information on the R166 billion, which was the estimated settlement value of claims against the state at year-end.
Financial and Fiscal Commission (FFC) Submission on the 2022 Budget - 2022 Appropriation Bill and 2022 Second Adjustments Appropriation Bill
Dr Patience Mbava, Chairperson of the FFC, led the Commission’s team in their submission on the 2022 Appropriation Bill and Second Adjustment Appropriation Bill.
Mr Chen Tseng, Head of Research, provided an economic overview and prospects of the country. The inflationary pressure, the impact of COVID on economic growth, civil unrest in KwaZulu-Natal (KZN) and Gauteng, and the decline in private fixed capital formation were all highlighted.
A consolidated budget deficit of 6% of gross domestic product (GDP) was projected for the 2022/23 financial year. The exorbitant debt service cost, non-performance of state-owned entities (SOEs), and a narrowing tax base due to rising unemployment all had a negative impact on the country's fiscus.
The Second Adjustments Appropriation Bill Bill is to: effect adjustments to the appropriation of money from the National Revenue Fund for expenditure approved in the 2021/22 financial year. In 2022/23, contingent liabilities will reach R1.17 trillion, accounting for 18.11% of GDP due to tenacious SOE cash shortfalls and stringent borrowing requirements.
The Commission presented the financial performance of SOEs and public infrastructure investment.
For public entities and infrastructure investment, the Commission recommends that:
- Government should assess the SOEs to appraise their profitability feasibility, operational efficiency, their track record in resolving market failures, and attaining developmental goals;
- Government should homogenise the legislative framework for SOEs to remove legal ambiguity, reinforce implementation, and improve disclosure and reporting requirements;
- Government should implement the necessary operational, governance and financial reforms that would enable SOEs to effectively and efficiently deliver infrastructure to realise returns on investment.
The Commission highlighted the importance of balancing recovery and fiscal sustainability.
The Commission supported government’s decision to prioritise funding for social protection alongside increases for key votes within the economic development cluster but emphasised a number of points – see attached for further details.
Parliamentary Budget Office (PBO) 2022 Appropriations Bills assessment
Dr Dumisani Jantjies, Director: Parliamentary Budget Office (PBO), led the presentation on the PBO’s assessment of the 2022 Appropriation Bill.
Dr Seeraj Mohamed, Deputy Director: Economics, provided an overview of the social and economic situation, both globally and domestically, which provided the context for the 2022 Appropriation Bill. Social Protection and Safety and security are the two largest expenditure functions of the national sphere of government. Since the 2022 Appropriation was proposed, outlook for the global and SA economy has deteriorated. Household finances and poor investment levels globally still constrain demand, therefore interest rate increases are a blunt instrument. Domestically, several constraints add additional downward pressure to key macroeconomic variables, such as inequality, unemployment, inflation and growth.
He provided an overview of government’s policy priorities, such as job creation, infrastructure, small business development, the business environment, agricultural sector and land reform, etc.
An overview of the appropriations to various governmental departments was provided. The total amount to be appropriated amounts to R1 959 billion, and this amount excludes the provisional allocations and infrastructure fund not assigned to votes and the contingency reserve.
The presentation outlined risks to the 2022 appropriation, including contingent liabilities, support for SEOs, key financial health indicators in departments, and AGSA calls for action on accountability for the use of public finances.
Contingent liabilities refer to financial obligations on government that arise from specific events occurring. Contingent liabilities have been growing (R1.17 trillion in 2022).
The financial position of major state‐owned companies remains under pressure. To meet short‐term obligations in 2020/21, most of these companies deferred their capital investment projects to preserve cash. These deferrals resulted in a 6.2 per cent decline in their consolidated asset base. Continuous delay and underspending on infrastructure projects hamper capital investment.
The sustainability indicators and the high unauthorised expenditure painted a picture of departments unable to operate within their budgets, resulting in deficits, cash shortfalls and bank overdrafts.
Key governance failures that could affect the implementation of the 2022 Appropriation Bill included:
- Low levels of accountability among accounting officers and accounting authorities;
- Lack of internal controls, in particular, implementation of preventative controls;
- Control weaknesses in government’s information systems resulting in project failures and financial loss;
- Poor decision-making, neglect or inefficiencies which continued to result in high levels of fruitless and wasteful expenditure;
- Lack of oversight, monitoring and assurance;
- Lack of material compliance with legislation – not paying creditors on time.
The Second Adjustments Bill is to effect adjustments to the appropriation of money from the National Revenue Fund for expenditure approved in the 2021/22 financial year; and to provide for matters incidental thereto for: National Treasury to purchase equity in SASRIA: R18.1 billion and Health to purchase goods and services to address the needs of Covid-19: R500 million.
See presentation for further details
Mr D Ryder (DA, Gauteng) noted that in the Medium Term Expenditure Framework (MTEF), a vast sum of money was being spent on higher education, whereas basic education got only a very small increase. He expressed confusion over this arrangement because intervening at the end of the education process was not as effective as doing it at the very beginning. He thus suggested that the Departments of both Higher and Basic Education should come to the Committee and have a collaborative discussion on the issue.
Mr Ryder commented that the FFC’s presentation's reporting format on the infrastructure recovery was in percentages, whereas Members wanted to know the rand amount. He commented that the recovery plan seemed to depend on the private sector entirely.
He asked the FFC to give its opinions on COSATU's 10% increase demand for its employees and its implication for the budget.
He asked the FFC about the special appropriation amounting to R500 million for the vaccination programme. Given that fewer than 30% of the country’s population had been vaccinated and the take up was almost zero, he wanted the FFC to explain what justified the R500 million.
Mr Ryder asked the PBO about the President's number of promises in his State of the Nation Address (SONA) and how those promises had been translated into budget allocations.
He referred to government’s lack of disaster planning, as shown by the lack of contingency reserves and preparedness in dealing with the extreme disasters of the past few months or years.
He was concerned about the impact of the signs of distress that were beginning to show among the 700 small SOEs. He remarked that those small amounts could lead to a huge impact if they were not monitored and measures taken immediately.
He raised his concern on the overdraft issue, where the presentation mentioned that about 19% of government departments had overdrafts. He questioned the legality of such behaviour and practice. He said such a practice cast a negative image on government and wanted to know the total overdraft in rand amounts.
Mr M Moletsane (EFF, Free State) asked both the FFC and the PBO what strategy measures had been put to curb the poor performing and inefficient SOEs that negatively affected public expenditure. He highlighted the need for financial and leadership stability to ensure profitability.
Mr F du Toit (FF Plus, North West) asked the PBO to give more information on the estimated R166 billion settlement value of claims against the state at year-end.
The Chairperson asked the PBO and FFC their views on the options for government to best deal with its increasing rate of debt service cost, which accounted for 15.4% of the budget and amounted to R300 billion during this MTEF.
She asked the FFC and the PBO to give their opinions on the proposal to replace the Social Relief of Distress (SRD) grant with a permanent universal grant and its fiscal implications.
Mr Tseng explained South Africa’s debt portfolio. In his view, South Africa was quite fortunate that the majority of its debt was made up of domestic debt. However, the country did have foreign-denominated debt, subject to volatility. The silver lining in the foreign-denominated debt was in its diversity. Some organisations such as the International Monetary Fund (IMF) and the World Bank had given South Africa very good loan conditions, such as a one percent loan interest or a certain grace period. The issue to address the rising debt service cost, in his view, was for South Africa not to rush to raise further debt, as well as active management focusing on the debt which had higher loan interest rates. For instance, he used the example of Eskom, which had recently managed to raise R100 billion of debt through the bond market. Mr Tseng cautioned over this approach and indicated that the issue was not about whether creditors were interested in lending money to Eskom because there were many interested creditors out there. The problem was about the amount of the debt and debt service costs, which would have a huge impact on the country's fiscus.
Mr Tseng responded to the Chairperson’s question on the SRD grant and the possible replacement of a Basic Income Grant (BIG). He acknowledged the immediate positive impact of the BIG but questioned its medium- to long-term sustainability. Implementing the BIG would break the fiscal system, leading to the depreciation of the rand. Furthermore, he argued that there was no solid research so far that could detail the immediate improvement of people’s livelihoods. He said the FFC touched on the issue in its annual submission for the 2023/24 financial year, which was due to be tabled in May.
Responding to Mr Moletsane’s question on what strategies were in place to change the situation at SOEs, he pointed out that the key issue to tackle was that government should start to pay attention to the multi-million rand and multi-year contracts. Those contracts deterred accounting officers from making changes to the existing business model. Hence, those contracts related to power generation suppliers such as gas and coal must be reviewed, and those that add no value to the SOEs must be set aside.
Mr Tseng pointed out that although the increase in the cost of living had been tabled as a driving factor behind the rationale of COSATU’s 10% wage increase demand, the argument should have been more nuanced. The argument should have included non-core vs core inflation. Mr Tseng’s view was that core inflation had diverged and was more worrisome during this COVID period. Hence, he believed that the 10% increase was above what the fiscus could afford at the moment.
Mr Tseng pointed out that the expiry of vaccines should be considered in the allocation of vaccines. There had been a significant drop in patients’ vaccination rates, and there was a need for government to increase the pick-up rate on the demand side so that there would be less wastage of vaccines. He suggested government should host campaigns to change the public’s perception that they should not be vaccinated.
Prof Aubrey Mokadi, FFC Commissioner, informed the Committee that Dr Mbava could not join the platform.
He agreed with Mr Ryder’s suggestion to invite both the basic and the higher education departments, as he believed it was critical to have such forms of engagement. The FFC’s recommendation had raised the same point. The Commission’s concern was that the increase in National Student Financial Aid Scheme (NSFAS) funding would create future expenditure that would need to be met, but so far, there were no government directives to indicate that the budget and the economic growth would sustain that increase. The increase in the number of learners enrolled meant that there needed to be more hiring of new teachers, which required a contingency plan by the Department of Basic Education (DBE). Furthermore, the Early Childhood Development (ECD) programme being shifted from the Department of Social Development to Basic Education was something the Commission had never heard of. The DBE already faced huge problems, such as big drop-out rates at primary schools, and few learners successfully made it to matric.
Prof Mokadi indicated that the new funding model for NSFAS had still not been brought to light, despite the plan kicking in next year. The discussion process should involve a lot of stakeholders, given the complexity of its nature.
Dr Jantjies commented on the fiscal space for debt service costs and indicated that there were sectors that had benefited a lot, which government should tap into as a source of tax revenue.
He acknowledged and stressed the importance of implementing the BIG, as it was necessary for many households. He urged the Committee not to look at the issue in isolation from the South African context. The vast inequality in society was in direct contravention of the Constitution, which was what the government could not afford to have. He criticised the mainstream media for negatively portraying the BIG. His view was that the BIG should be seen holistically as an economic policy instead of an expenditure the country could not afford. He assured the Committee that the implementation of the BIG would cost a lot to the country in the initial stage, but eventually, the reward would come back to the economy. For instance, once the BIG was being implemented, more people would be able to spend money, which would lead to an increase in consumption tax which would eventually lead to more revenue growth for the country.
Dr Nelia Orlandi, Deputy Director: Finance, PBO, said that departments sometimes did not provide performance indicators for their programmes in the MTEF. She clarified that the PBO always had to be cautious because usually, there were discrepancies between the new interventions proposed in the medium term strategic framework (MTSF) and the corresponding performance indicators and targets. Sometimes it was difficult to monitor departments’ new interventions because those new targets were not reflected in the performance plans. The PBO was busy matching departments’ annual performance plans (APPs) against their new interventions within the MTSF. Once that process was concluded, the PBO would circulate those documents to Members.
Dr Mohamed emphasised the importance of infrastructure spending and investment and setting long-term goals for sustainable development. He believed it was a myopic vision that government focused on fiscal consolidation to keep debt low. He suggested government should rather think about what it should do to sustain the economy and truly understand the meaning of sustainability. The United Nations’ sustainable development goals (SDGs) highlighted the importance of people sustaining their livelihoods and the necessity of providing basic services such as infrastructure to people. For instance, people blamed the collapse of SOEs on corruption and maladministration without thinking about the long-term solution to the matter. The failure of Eskom was caused not only by state capture and corruption but it was also by a period of lack of investment since 1994. The government needed to prioritise strategy before money and focus on how it could make the economy more sustainable.
He criticised government’s cautious approach to increasing taxes. Keeping taxation low was that the government had not been spending enough on social services, thus leading to numerous socio-economic ills such as unemployment, inequality, the bulk of people living unsustainable lives etc.
Dr Mohamed criticised those who were spreading scare-mongering information on the proposed BIG. He recalled that South Africa had also experienced a similar phase on the junk creditor status a few years back. He highlighted the importance of enabling poor households to spend money to boost the economy. He suggested that government increase and promote economic activities in local areas, shifting the economic structure from being dependent on the financial sector to transform it into a structure that could benefit the majority population, diversify the manufacturing base, etc. The ultimate question which should be asked was whether the country could afford not to have the BIG.
Referring to concerns about the rising cost of debt, Dr Mohamed argued that debt growth was commensurate with economic growth. Government could do many things in the short term, such as reducing waste and corruption, increasing taxes, etc. He recommended increasing wealth tax, saying that the government should target the top 0.1% of the population.
Mr Siphethelo Simelane, PBO Finance Analyst, outlined the composition of the R166 billion, which was the unsettled claims against state departments. Those claims were made by court orders or by agreements between two parties. They included the Department of Health claims, which amounted to R124 billion, accounting for 75% of the total claims against the state. Those claims mainly involved medical negligence. The claims against the South African Police Service (SAPS) amounted to R7.7 billion, mainly related to unlawful arrest and the unnecessary use of firearms. Claims against the Department of Higher Education amounted to R5.1 billion, mainly consisting of claims against NSFAS and the Minister.
He informed the Committee that as the claims had exceeded the allocated budget for the Department of Health, the Department was already using its budget for next year to pay for the claims related to medical negligence.
Mr Ryder highlighted the importance of the increasing divergence and asked the FFC about the composition of the inflation basket. He highlighted the need to note the change in spending patterns of South Africans as COVID, unemployment, the rising cost of food, fuel etc., were making lives extremely difficult for many citizens.
Mr Tseng agreed with Mr Ryder that a review of the inflation basket was warranted, as it could use that basket for future policy decisions.
The minutes of the Committee's meeting dated 18 May 2022 were adopted.
The meeting was adjourned.
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