The Budget Committee (the Committee) of the Western Cape Provincial Parliament (WCPP) convened virtually for briefings on the public service wage bill for the next three medium term expenditure framework (MTEF) periods by the National Treasury, the 2021/22 fourth quarter financial and non-financial performance by the Provincial Treasury, and the quarterly performance reporting system by the Department of the Premier.
Members were alarmed that the R9 billion required to fund a 2% increase in the public service wage bill was not budgeted for in the fiscal framework. The concern was that government would have to borrow money to pay for the wage increase. The Committee was given the assurance that borrowing was not being considered. National Treasury was counting on a windfall, similar to the higher than expected revenue collected in the previous financial year. The plan was to reprioritise the budget should the windfall not materialise.
Mr Marumo Maake, Chief Director, Public Sector Remuneration Analysis and Forecasting, National Treasury Budget Office, introduced the officials who were accompanying him to the meeting.
The Chairperson welcomed Ms M Wenger (DA) to her first meeting in her capacity as Minister of Finance and Economic Opportunities.
The Minister appreciated the opportunity to attend her first Committee meeting in the new position. She conveyed the importance of sharing the quarterly performance indicators with the Committee. It would enable Members to interrogate the performance when conducting oversight over the provincial government.
Mr David Savage, Head of Department (HOD), Provincial Treasury, introduced the Provincial Treasury delegation.
The Chairperson commented that the National Treasury (NT) presentation was based on a past resolution. The Committee needed to understand the public wage budgeting process for the next medium term expenditure framework (MTEF) period.
National Treasury presentation: public service wage bill
Mr Maake said the NT was in the process of working on the wage bill projection over the next three years. In an overview of the 2022 budget he explained that between 2006/07 and 2021/22, the wage bill was the fastest growing item in the overall budget. Over the same period, remuneration exceeded economic and revenue growth. Almost 32% of the 2021/22 consolidated spending was attributed to compensation. The largest deviation in the 2021 budget was due to the 2021 Public Service Coordinating Bargaining Council (PSCBC) wage agreement. Government continued to respect the collective bargaining process and acknowledged that the wage bill was a sensitive matter. Trade-offs were needed because escalating wage agreements would present a very dangerous fiscal path in the near future.
The windfall in the previous financial year provided the NT with the budget space to make additional funds available for education and health purposes to accommodate the growing population and service delivery demands. The education, health and police sectors accounted for nearly 83% of the total public service. However, the public service was not bloated, as statistics reflected slower growth in headcount over the years. Higher unit costs or wages had a negative impact in terms of increasing the headcount. The decrease in the headcount in the police sector was a concern because it was not in line with the prevailing crime situation.
The wage negotiation process was underway. Wage offers were in the public domain. The final offer of 2% would require R9 billion which was not budgeted for in the fiscal framework. The state would find future negotiations very difficult should the 2% offer be rejected. Containing the wage bill would depend on the outcome of wage negotiations between the NT, the Department of Public Service and Administration (DPSA) and labour unions. As at 29 July, the process was at an advanced stage.
Mr R Mackenzie (DA) said the trends of the public service wage bill and the composition of the public service were two important factors in light of the Constitutional Court judgment. He was concerned that the NT was at risk of having to borrow the R9 billion if budget cuts could not be found. He wanted to know if other projections had been done to ensure that provinces would not be expected to bear the burden, given the recent inflation numbers. He asked if the technical and consultation teams involved in the 2018 wage agreements had been repositioned, considering the flaws in some of the decisions as highlighted by the Constitutional Court. He wanted to know if the NT was considering reducing headcount by not filling positions left vacant by retirees, especially at non-performing state-owned enterprises (SOEs). He proposed a transfer of some of the SOE functions to line departments to cut costs. He asked when a determination would be made to save billions spent on consultants.
Mr G Bosman (DA) sought clarity on whether the NT would have to borrow in order to fund the increase in the cost of compensation. He asked where the funds allocated to education and health would come from.
The Chairperson said the amount presented as a percentage of the budget did not seem sustainable. She enquired about the international best practice in terms of the percentage of public wages in a governmental budget. Borrowing for infrastructure was understandable, because of the return on investment at a later stage. However, borrowing to pay wages was not normal in an investment sense. It seemed to be an underestimation of the problem by the NT which provinces might have to deal with in future.
Mr Maake replied that the wage bill was normally accounted for as a percentage of gross domestic product (GDP), similar to the Organisation for Economic Cooperation and Development (OECD) countries, but South Africa was spending more than the OECD countries in terms of the wage bill as a percentage of GDP. This was not sustainable. Currently, comparisons were being made with Norway and Denmark, but the government contribution to the wage bill did not match the contribution of those countries. He was of the opinion that comparisons should rather be made with South Africa's peers. The delivery model also had an impact on the wage bill percentage. 83% of compensation spending had been allocated to three sectors -- police, education and health. 84% of the population was reliant on the public health system, compared to the national health system (NHS) in England, where the private sector was playing a much bigger role. The same comparison could be made among provinces in South Africa. For example, the Western Cape was spending between 50% to 55% of its budget on the compensation of employees (COE) while other provinces, with large numbers of no-fee schools, were spending up to 70% of their budgets. He proposed that an acceptable benchmark should be set. A red flag should be raised when the benchmark was exceeded.
He agreed that borrowing for wages should be avoided, because it would undo all the prior year's work on fiscal consolidation. Trust in government would be eroded and the market, investors and rating agencies would doubt the credibility of the budget. The current inflation rate was making the wage negotiation process difficult for both government and other employers. A wage freeze had been attained as a result of the Constitutional Court judgment. In addition, the 2021 cash gratuity was a once-off payment which meant that public servants' salaries had not been increased for two years. The NT was hopeful that the windfall would continue to provide relief in the current financial year. The strategy was to keep the COE constant, to protect the provinces from having to bear the burden.
The issue of high wage increases impacting on headcount had been put on the table during the wage negotiations. The NT would have to give direction to avoid an unfunded mandate through wage negotiations. To avoid the mistakes highlighted by the Constitutional Court, a certificate of compliance must be issued by the PSCBC once an agreement was reached at the public service summit. The employer caucus, consisting of both national and provincial representatives, formed the government negotiating team who would take responsibility for overseeing the negotiations.
Mr Maake said the use of consultants was a procurement issue. Cost containment measures were implemented to discourage departments from hiring consultants for work that officials were supposed to do. Labour was similarly concerned with the use of consultants, and labelled it as the ‘agentisation’ of the state. A review of the headcount at all public entities had started to determine whether officials could be absorbed in government departments, or if they should exit the system. Consultants should be used only if there was a need for the service and for a limited period.
In closing, he reiterated that borrowing for wages would set the wrong precedent. The fiscal consolidation exercise had been done to stabilise the debt. Projections were pointing to a positive primary balance in 2024/25. The most important message was to protect critical services.
Prior to 2009/10, provinces were spending large amounts on consultants. Over the years, the pressure on provincial budgets had led to a decrease in business consultant expenses. Services not offered by government, such as infrastructure planning, tended to be outsourced. In analysing provincial budgets, the integrated governmental relations (IGR) team had concluded that the use of consultants appeared to no longer be a big issue.
The Chairperson said it seemed that negotiations were being done on a piecemeal basis. She summed the wage bill problem up as follows: R9 billion was needed, the funds were not available, borrowing was not being considered and it was unclear where the money was going to come from. Although the message was to protect services, the plan was lacking. She sought clarity on where the money was going to come from.
In response, Mr Maake said that the higher than expected 2020/21 revenue had provided a windfall. He was hopeful that the windfall would continue in the current financial year. Reprioritisation would have to happen in the absence of a windfall. Work was being done by the IGR team to identify sectors which would need to be protected from reprioritisation. He said the government might be lucky to fund the required R9 billion through the continuation of a projected windfall. The solution required the consideration of a combination of factors. The NT would be providing guidance and advice after the conclusion of the negotiation process.
The Chairperson was sceptical about the projected windfall, and said luck was not going to assist the situation. She invited the Director-General (DG) of the Department of the Premier to give his input.
Dr Harry Malila, DG, Department of the Premier, said government was facing a difficult situation and needed to either add to the fiscus or face strike action. The options were to borrow or cut the baseline if the money was not available. He agreed that borrowing did not make economic sense. The first round of negotiations would be finalised on 29 July. According to the Minister of Finance, there was no money available. The negotiating committee would have to deal with the matter, and provinces should put plans in place. A combination of various fiscal instruments were required to find the R9 billion.
The Chairperson thanked the NT for the presentation. Members had been given a lot to think about in terms of possible recommendations and resolutions and how to assist with the problem in the medium term budget policy statement (MTBPS) period.
Provincial Treasury presentation: 2021/22 fourth quarter preliminary performance
Ms Analiese Pick, Chief Director: Provincial Government Public Finance, said the quarterly performance report had been done in partnership with the Department of the Premier. The quarter four report represented a preliminary report on outcomes for the entire 2021/22 financial year. The report was a result of two different systems -- the financial reporting system that reported directly to the NT, and the non-financial reporting system that reported into the framework of the Department of Planning, Monitoring and Evaluation (DPME). The systems were verified internally and by the Department of the Premier. The goal was to integrate the reporting from both the financial and non-financial perspectives. The integration was required to measure performance as well as the impact of outcomes by joining data and research information.
79% of targets had been met by the departments. On average, the province had spent 99% of its budget to achieve 79% of the targets.
Provisional under-spending in 2022/23 was projected at R731 million, compared to R1.3 billion in 2021/22.
On COE, the province under-spent R33.6 million on a budget of R39 billion in the current financial year, compared to the over R400 million that was under-spent in the previous financial year. The reduction in the under-spending reflected the impact of the budget and COE strategy which had been rolled out in 2021 to contain the COE budget. Departments had been allowed to apply a differentiated approach regarding employee compensation. Transversal principles had been applied by some departments, but the majority of the departments had introduced COE committees. The automatic filling of posts no longer took place. As part of the instruments to introduce efficiencies, critical posts were considered first when vacancies occurred. Any savings on the COE budget could be used for approval of retirement requests. In this manner, the Department had managed to maintain the 52% spent on COE.
Ms Pick explained that the R731 million under-spending was mainly due to goods and services as a result of the impact of Covid-19, not only on health services in terms of the vaccine roll-out, but also from an infrastructure perspective.
Mr Jacques Barnard, Chief Director: Strategic Management Information, presented the context for the release of the fourth quarter report for departments and public entities. Non-financial performance was viewed from two lenses -- a snapshot of the overall performance in relation to the targets, as well as a snapshot of the Covid-19 interventions for the 2021 financial year and new interventions for the current financial year. It was important to note that Covid-19 interventions had been collated via the provincial data office. The quarterly performance data was validated prior to reporting.
Department of the Premier presentation: Quarterly performance reporting system
Ms Z Ismail, Head, Legal Services, Department of the Premier, said the strategic goal of the reporting system was to incrementally enhance the value of performance data by increasing its use in decision-making. Ms Pick demonstrated the integration between financial and non-financial performance data in her presentation.
Through deeper analysis of the data on a policy, sectoral or budget programme level, the effectiveness, relevance and sustainability relating to the impact of government programmes could be interpreted. This was important, as the impact of government programmes should improve the lives of citizens.
The Chairperson asked what the requirements were for an integrated reporting system. She wanted to know how long it would take to implement the system, and if a progress update could be provided after six months.
Ms Ismail replied that the focus was on data integration, rather than system integration. She would be able to demonstrate progress after six months.
Dr Malila said proper data was needed to strengthen the decision-making process. The Department would be able to show the benefits of the system by the end of this financial year.
The Chairperson said a general update might not be useful. She proposed a demonstration of the system so that Members could see how it worked. The Committee appreciated the hard work of the officials from Provincial Treasury and the Department of the Premier to prepare the presentations.
The minutes of the meeting held on 24 June were adopted without changes.
Resolutions and actions
The Chairperson proposed the scheduling of a demonstration of the integrated reporting system by the Head: Legal Services, Department of the Premier. It had been brought to her attention by a staff member of the Committee that the adjustment appropriation period would coincide with the demonstration should it take place after six months. The Chairperson agreed to arrange the demonstration for February 2023.
The Chairperson reminded Members to keep monitoring the public wage bill negotiations. She was concerned about borrowing to fund wage increases if national departments did not cut the baseline.
She drew attention to the meeting scheduled for 19 August with the Children’s and Gender Commission on previous budget matters. She had been notified that the Commissioner might not be able to attend the meeting. The contribution of the Commissioner was needed, given the nature of the discussion. She therefore proposed that the meeting be postponed.
Mr Bosman supported the postponement of the meeting.
The Chairperson undertook to contact and inform the participants of the meeting accordingly. She requested Members to keep an eye on their e-mails for updates on the Money Bill Amendment Procedure Bill matter.
The meeting was adjourned.
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