Appropriation Bill & Eskom Debt Relief Bill: PBO briefing

Meeting report

Presentation by the Parliamentary Budget Office: 2023 Appropriations Bill assessment and comments on the 2023 Eskom Debt Relief Bill 20 April 2023

Dr Dumisani Jantjies, Director, Parliamentary Budget Office (PBO), led his team, which included Mr Tshepo Moloi, Economic Analyst, Parliamentary Budget Office, Dr Nelia Orlandi, Deputy Director, Parliamentary Budget Office, Dr Mmapula Sekatane, Policy Analyst, Parliamentary Budget Office, Mr Siphethelo Simelane, Public Finance Analyst, Parliamentary Budget Office, and Dr Seeraj Mohamed, Deputy Director: Economics, Parliamentary Budget Office, in making the presentation. The presentation provided an overview of the 2023 Appropriations Bill, which appropriates funds from the National Revenue Fund for the 2023/24 financial year and prescribes conditions for spending funds withdrawn for the 2024/25 financial year. The presentation emphasised that these funds are specifically and exclusively listed, meaning they may only be used for the purpose indicated, unless an Act of Parliament amends the amount or purpose.

Parliament is required to pass, with or without amendments, or reject the Appropriation Bill within four months after the start of the financial year to which it relates. The presentation also discussed the macroeconomic outlook and spending priorities, highlighting key areas such as infrastructure investment, job creation, and social welfare programs. It identified possible risks to the Appropriations, such as fluctuations in the global economic environment and potential natural disasters and provided an assessment of the Appropriations based on these factors. Finally, the presentation included comments on the Eskom Debt Relief Bill, which seeks to provide financial relief to Eskom, a state-owned electricity provider facing significant debt. The presentation discussed the potential implications of the Bill on the national budget and the wider economy. Overall, the presentation provided a comprehensive overview of the economic and strategic considerations underlying the 2023 Appropriations Bill, highlighting key priorities and potential risks, and addressing the implications of the Eskom Debt Relief Bill.

See attached for full presentation

Discussion

Mr Z Mlenzana (ANC) emphasised the importance of the presentation in shaping the final decisions that would be taken to Parliament regarding the two Bills. He discussed three issues, starting with the question about the Eskom debt relief and its major intention. He asked for clarity on the positive and negative implications of government's loss in the state of disaster case. He also raised concerns about the technical comments required from stakeholders on the proposed exemption, which had a short time frame. Moving on to the repositioning of State-Owned Enterprises (SOEs), he asked for clarity on the structure of these entities and how they can be repositioned for better performance. He referred to the historical challenges experienced by Transnet and emphasised the need for a better understanding and relationship between the entities to avoid fruitless and wasteful expenditure. He suggested that the Department of Public Enterprises (DPE) carefully spin-off human resource expenditure. Lastly, he discussed a talk show he listened to and questioned the justification for the huge sums of money taken back to Treasury for certain projects. Overall, he highlighted the need for transparency, oversight, and careful consideration of the implications of decisions made regarding the Bills and the repositioning of SOEs.

Ms T Tobias (ANC) suggested that there was a need for the focus to be on demanding action. She compared this to the issue of the wage bill, which has been a long-standing issue. She also suggested that the emphasis should be on taking action to address these issues, rather than just presenting them. She expressed a desire for greater clarity on why the National Credit Regulator (NCR) was not audited; it was an important organisation that provides accreditation for companies that receive large sums of money from state companies. She stated that this understanding would help to prevent frustration and confusion.

Mr O Mathafa (ANC) asked several questions related to economic performance, spending priorities, non-tax revenue sources, and budgeting approach. He questioned if the country's economic fortunes depended solely on government activity, and if there had been a study to analyse the correlation of private sector performance with the country's overall economic growth. He also asked about the alignment of spending priorities with national objectives and realities and how to mitigate the risk of compensation, particularly of employees as the biggest risk in terms of spinning pleasures. He questioned if it was time for the state to start considering other revenue generation sources and how to increase revenue to mitigate the risk of a high wage bill. He also raised concerns about the contradictory approach to budgeting, where fiscal consolidation and budget surpluses may not be ideal when looking at financial requirements for infrastructure and social security.

Ms N Ntlangwini (EFF) expressed gratitude for the enlightening presentation on the budget and its shortcomings. She referred to past incidents of corruption within government entities such as Denel, Eskom, and South African Airways (SAA). She questioned whether any research had been conducted on the accountability of the Presidency budget votes. She raised concerns about the lack of a parliamentary committee overseeing the spending of these budgets and highlighted the potential consequences of a lack of accountability. She urged for more effective oversight and accountability measures to be put in place.

Mr A Shaik Emam (NFP) raised several questions. He expressed concern that SAA is being sold to someone who cannot fund it and asked for the PBO's point of view on the secrecy surrounding the deal. He also asked for the PBO's view on Treasury's exemption to Eskom not to divulge irregular expenditure of its financial aid. He asked for an explanation regarding the difference between loans and bailouts and whether taxpayers would be left to bear the burden of non-payment of debts. He inquired about government's efforts to boost revenue collection, tax evasion by foreign national-owned businesses, and the high student dropout rate. He asked for the PBO's opinion on exempting low-income earners from tax and whether enough measures have been put in place to enhance infrastructure growth and reduce losses due to lack of value for money. He also raised concerns about the debt and cash reserves of some metros and government's efforts to create jobs and deal with corruption.

Mr X Qayiso (ANC) raised concerns about the duplication of functions within SOEs. He suggested that the SOE Council needs to work with a council to monitor progress in transforming state entities, especially considering the high number of SOEs with CEO positions that have become a financial burden. He questioned the reason for an increase in state personnel numbers in the Correctional Service and the South African Defence Force (SADF) despite insufficient budgets. He also sought clarification on whether the training of new police recruits would still take place. He was concerned about the impact of the proposed tariff increase on ordinary citizens, especially in light of the 7% inflation rate. Lastly, he suggested that wealth tax could be a solution to the country's economic problems. He also asked a question and mentioned that he had forgotten to discuss a particular area that had also been raised by his colleague, of the NCR. He questioned whether there was a relationship between owing money and the classification of an asset as a financial service. He referred to the suspension of 400 agents or service providers and suggested that there may have been mistakes made in how credit was offered, including dropping people into debt. He asked if there was a connection between this report and the work being done by the NCR.

The Chairperson asked about the implications of the treasurer being overly optimistic about Gross Domestic Product (GDP) growth and the effects of the recent increase in interest rates on wage growth. He also inquired about the realisation of small business development, direct charges in the budget, and the allocation of funds for goods and services and infrastructure. Additionally, the Chairperson asked about the decreasing condition of contingent liabilities and the financial sector's performance, which he suggested was due to a windfall from the South African Reserve Bank. Further, the issue of Eskom’s exemption was raised and he asked for an educated opinion on whether it should continue to be included in legislation.

PBO Response

Dr Jantjies thanked the Committee for its questions and expressed gratitude for the guidance they had received. He acknowledged the need for further support and recognition of their work. He mentioned that he had attended a meeting with his Organization for Economic Cooperation and Development (OECD) counterparts regarding the issue of climate change and its effects on the economy. He stated that South Africa was one of the country’s leading the way in using the budget to address climate change, but more support was needed for the energy industry. He believes that public financing should be used to ensure a stable supply of electricity, and that governance concerns over time need to be addressed. He acknowledged the perception of corruption in the industry and the need for restructuring. He stated that the role of government in the economy was important and that macroeconomic interventions were needed to ensure economic growth and sustainability.

Dr Mohamed addressed several topics related to economic growth, interest rate increases, wealth tax, and tax avoidance. He emphasised the important link between economic growth and the budget, and that government deficit spending is the only way that will lead to growth in the private sector. He spoke about the constraint of the new economy and the need for the government to stimulate the economy out of a low-growth period to capitalise on more growth and investment. He also mentioned the issue of the nature of the South African economy, the level of concentration, and the large corporations in the financial sector, and how they are serving to help grow the size of the pie, rather than maintain a certain size of the pie while extracting wealth that does not necessarily get reinvested into growing the pie. He believes that government should play a more significant developmental role in transforming the structure of the economy through macroeconomic policies, infrastructure, and social expenditure. He suggested that more emphasis should be on demand-side approaches to the economy rather than supply-side approaches.

Mr Moloi addressed two specific questions. The first question was related to the observation that there has been growth in agriculture, but at the same time, there have been drops in the sector. He attributed this to the informal nature of the sector, as Stats SA is unable to document all the jobs in the space, and challenges with transport logistics, which prevent the sector from taking advantage of higher commodity prices. The second question was about the implications of the optimistic 0.9% forecast by National Treasury, which he believed would need to be revised and brought lower. This would have broader fiscal implications, affecting government's ability to raise revenue, spend and impact the debt dynamics. He also discussed the impact of higher interest rates on corporate and household debt, which could affect private sector profits.

Dr Jantjies highlighted the issue of underspending as a major concern. While there has been consistency in understanding the budget, there are issues with control, appropriateness, and allocation that impact programme completion and lead to wastage. Capacity is a significant factor, as is congestion in certain areas. He requested the opportunity to present to the Committee at a later stage to enable oversight in these areas.

Further discussion

Mr Qayiso requested clarification on the issue of police budgeting. He noted that the budget allocated R7.8 billion to train 5000 new police officers, but expressed concern that potential budget increases may render the allocation unaffordable. He asked how this would affect the budget and whether the R7.8 billion would still be available for the country's use.

Ms Tobias stated that during the response to a previous question, it was mentioned that there is no evidence that company income tax could harm the economy. She encouraged them to avoid shying away from policy discussions and refer to research documents to advance the quality of discussions. She emphasised the importance of the PBO in empowering Members of Parliament (MPs) to have informed discussions. She mentioned that she always references real books and checks the budget itself, and that the PBO can provide valuable input to inform thinking and decision-making.

Dr Orlandi confirmed that the personnel numbers for the next three years will definitely include 5,000 recruits per year, as indicated in the police budget. However, there is concern that the expenditure on personnel is actually decreasing, which may lead to some senior personnel taking early retirement. This creates uncertainty regarding the actual cost of the recruits. The credibility of the budget is therefore being questioned, given that personnel numbers are increasing while expenditure is decreasing. In other matters, the issue of high inflation was discussed, with questions raised on the causes of inflation and how fiscal policy can be used to address it. There is a need for evidence showing that high corporate taxes negatively impact the economy before considering raising taxes in this sector. Finally, she emphasised the need for the budget office to have sufficient resources and capacity to deliver on its mandate, especially as it approaches its 10-year milestone.

Dr Jantjies stated that the first part of their analysis focused on the issue of high inflation and the role of mantra 32 in dealing with inflation. PBO questioned how much of the inflation was caused by higher profits or the passing of costs onto consumers who cannot afford it. It suggested using fiscal policy to discourage higher profits and price fixing, which could lead to higher profits. However, it noted that evidence of such practices globally has been limited. The second part of the analysis focused on the argument that corporate taxes in Thailand are high, but the effective tax rate on corporations has actually been far higher. Arguably there needs to be evidence to support not raising taxes in this sector. Finally, he pointed out that the PBO has been in operation for almost ten years, and that it needs more resources to continue to deliver on its mandate.

Closing Remarks

The Chairperson thanked Dr Jantjies, his team, and other Members for their contributions to the debate. Before they left, the Chairperson asked Dr Mohamed to comment on the country's constrained supply-side economy and the high cost of capital. The Chairperson also requested that Dr Jantjies research tax avoidance, illicit financial flows, base erosion, and profit shifting, as it is a topic that South Africans have been discussing but lacks scientific documentation. The Chairperson also encouraged Dr Jantjies to share any research outcomes that could assist the Committee in their work, even if it is outside of the budget cycle.

The Chairperson expressed gratitude to all attendees, including Members, support staff, members of the public, and media. He then adjourned the meeting and thanked everyone for their participation.