FFC 2024/25 Division of Revenue Annual Submission

Meeting report

The Chairperson welcomed the Committee Members and officials of the Financial and Fiscal Commission (FFC), who had come to brief it on the 2023/24 spending by government. He gave the FFC 45 minutes to present their presentation, and handed the platform over to its Chairperson, Dr Patience Mbava.

FFC Chairperson’s comments

Dr Mbava said that the role of the FFC as a constitutional institution was to make recommendations on government guarantees, municipal loans and provincial loans. The theme of the presentation was on improving service delivery and inclusivity in an environment of expenditure moderation. She said that the submission would be made up of two parts, and handed the platform over to Mr Siyanda Jonas, Research Specialist, FFC.

2024/25 division of revenue

• Impact of inflation

Mr Jonas said South Africa's gross domestic product (GDP) had increased by 0.4% in the first quarter of 2023. The fiscal balances were not looking good, and global financial markets were tightening. Consumer prices had reached record-high levels. Long-standing structural challenges impacted growth and undermined the progress in reducing unemployment and inequality. Inflation affected poorer households more than other households because they found it hard to buy assets because of the high entry cost. An inflation shock would increase short-term debt. If public debt was increased, there would be a decreased output for South Africa.

Recommendations

Treasury must continue to focus on fiscal consolidation on an expenditure and revenue mix. They must focus on achieving a primary surplus. Treasury and the Department of Social Development should develop a social security programme to protect the poorer populations which were exposed to the negative impacts of inflation.

• State-owned enterprises

State-owned enterprises (SOEs) posed a fiscal risk to the government because they required fiscal transfers to cover their losses and to recapitalise their balance sheets. The basic income grant (BIG) was a policy proposal for a permanent social assistance programme extending income support to those with no income.

Eskom's financial and operational performance - its profitability and solvency ratios -- had decreased. The net loss of the entity was constantly high, and there was a decline in its technical performance metrics.

Transnet's poor financial health was reflected by its profitability and solvency ratios. The entity had experienced a decline in coal and iron ore exports, and general freight volumes had decreased.

Government was highly exposed to SOEs, and the total guarantees to all SOEs had increased.

Sources of fiscal risk included insufficient resources, prioritisation of rate-of-return considerations, and excessive extraction from SOEs.

There was an immense reliance on social grants in South Africa. Kwa-Zulu Natal (KZN) received the largest amount of social grants, and the Northern Cape received the least.

Most Covid social relief of distress (SRD) grant applicants were between the ages of 20 and 35. Income support measures were therefore needed. Most applicants for the grant came from KZN.

Recommendations

Treasury should collaborate with SOEs' parent departments. They also needed to recalculate the amount that would be provided for the BIG grant.

• Learner-teacher support material (LTSM)

Ms Sasha Peters, Programme Manager, FFC, provided details of the funding for the LTSM. She said that the LTSM policy had been in draft form since 2014. The funding was not linked to the changing LTSM needs of learners in different grades. The provision of LTSM was central to addressing the challenge South Africa faced regarding reading for meaning. The demand for learner transport had increased but there was an inconsistency concerning the actual number of learners qualifying for the learner transport reported by the national Department of Transport.

Recommendations

The LTSM policy needed to be finalised and approved. A national programme must be implemented to improve reading for meaning. The data collection and reporting on learner transport needed to be improved. There needed to be a new funding model for learner transport.

• Climate change

South Africa was a signatory to international commitments to fighting climate change, but there was a weak translation of these domestically. Municipal responses to climate change were reactive, and not all municipalities were budgeting for climate change.  

Recommendations

Committees at the legislatures and municipal councils should exercise their oversight role by ensuring that integration, coordination and implementation of climate change responses take effect.

(For the full presentation, see attached document.)

Discussion

Mr A Shaik Emam (NFP) said that Treasury had claimed that South Africa was collecting less revenue, and asked how this could be increased. Did the FFC believe that enough had been done in South Africa to ensure that everyone was tax-compliant, as very little had been done to ensure that people were tax-compliant, especially foreign businesses? South Africa had a low productivity level and high manufacturing costs. He asked how this could be changed so that South Africa’s productivity increased and become more export competitive. 

Mr O Mathafa (ANC) raised a concern about the revenue collection being low, citing a recent article highlighting that the state was running out of money. He asked if the FFC had any suspicion of illicit financial flows currently happening. He maintained that when the private sector performed, the entire economy should also perform. He said that the salaries of board members and executive members in SOEs needed to be revised.

Mr E Marais (DA) said that there was an overlap between the SOEs. He asked to be provided with information on which municipalities had the biggest amounts of debt. They contributed the most to the country's financial problems.

Ms N Ntlangwini (EFF) requested that the Committee be advised of the number of SOEs that South Africa currently has and the functions of all these SOEs. She maintained that research needed to be done on the safety of scholar transport, because most of the vehicles used were not safe and the bus stops were not safe. For example, students living on farms in the Western Cape were being dropped off on national highways, which was unsafe. She asked if municipalities were aware that they had money that could be used for climate change projects, and if officials were properly trained in this regard. How could corruption be dealt with in municipalities?

Mr X Qayiso (ANC) asked how the fiscal policy could be revised so that service delivery was not adversely affected. He argued that the decrease in social grants did not make sense, because unemployment had increased. He asked what the FFC recommended should be done. What restrictions should be in place for the SRD grant? He asked what the effect of load-shedding would be on smaller and poorer businesses. The performance of Transnet was concerning, and it increased the problems in the South African economy. He asked that the Committee be provided with a reason why there was a locomotive shortage.

The Chairperson asked if members had anything else to ask the FFC.

Mr Shaik Emam said that the wealth of the country was in the hands of a few people. Botswana wanted its country to benefit more from mining. Did the FFC think that this should happen in South Africa as well?

The Chairperson asked that the Committee be given the figures of the indebtedness of the municipalities. Inclusivity in the South African economy had not improved. He asked how the FFC proposed that the economy become more inclusive, and that the Committee be provided with the reasons for under-collecting by the South African Revenue Service (SARS). To state that many South Africans held their assets in cash was incorrect, because statistics indicated that 75% of South Africans were in debt. What impact would high interest rates have on the economy? He maintained that there needed to be an increase in social services, but asked where the resources for this would be coming from.

Had the FFC looked at the Public Procurement Bill, and did they think it would achieve economic growth? Did the Committee engage with the provincial and national Departments of Basic Education? He said that the issue of local government receiving the smallest portion of national revenue was because of the assumption that municipalities could collect a lot of revenue. However, this needed resources. If there were no vibrant businesses in the area, there would be less revenue for municipalities. He asked what the FFC recommended could be done to deal with this.

Ms T Tobias (ANC) said that Parliament needed to change how it held institutions to account. Parliament needed a tool that made sure its suggestions were implemented, because if they were not, these meetings were a waste of time. She suggested that the Committee look at previous presentations and the implementation of the recommendations to see the improvements, so that these were not just presentations.

FFC's response

Dr Mbava agreed with Ms Tobias. She maintained that the FFC was concerned that some of their recommendations were not implemented by the executive, so the support of Parliament would be appreciated.

The FFC had considered the public wage bill and had raised concerns about the mushrooming of the Bill. It had recommended that the Department of Public Service and the Treasury consider revisiting remuneration structures. This would eliminate underlying wage disparities between people performing the same jobs.

In response to Mr Qayiso’s social development question, she said that the FFC had spoken about how grants should be equitably distributed. Applying for the grants was affected by resources such as internet connections. The current social grant network should be reviewed and implemented inclusively. If implemented very well, the SRD would show that a more permanent basic income grant could be implemented.

MrJonas addressed the budget deficit, and said that this was expected at the beginning of the year on the premise that there would be limited growth. He said that tax avoidance had a significant impact on the economy and the country's financial stability. There was a need to strengthen institutions fighting corruption and financial crimes, such as SARS and the South African Reserve Bank (SARB), to address this issue.

He said fiscal consolidation could happen without affecting service delivery if departments focused their expenditure on growth-enhancing projects, such as infrastructure and reducing consumption expenditure. This created employment and enhanced growth. He agreed that interest rates affected the poor. There sometimes needed to be a trade-off, but it had to be done in a way that would not have a long-lasting impact, slowing growth or making the poor worse off.

Ms Gianni Delle Donne, Researcher, FFC, concurred that the Commission had looked at the Public Procurement Bill, and there was currently a research initiative to improve it. She said there needed to be preferential procurement, because the Bill did not mention this. The scope should not be too narrow. The Bill had abandoned the restricted method but had not mentioned a threshold and needed to do this.  

She said that the FFC did not specifically consider the challenges businesses face within municipalities, so she could not give an opinion on this. Research shows that municipalities have unique challenges, so they should be given the resources that they need to be able to spend their grants effectively. The municipalities with the biggest share of debts were the City of Tshwane, followed by Johannesburg.

Ms Peters said that the issue of the safety of scholar transport had come up in the conducted research. When awarding the contracts, transport providers would come with compliant vehicles and then would not use compliant vehicles to transport the learners. Checks and balances needed to happen before and after the awarding of contracts.

Municipalities were lacking the financial and human capital needed to implement climate change policies fully. She said that the FFC had engaged with national and provincial education departments.

Mr Jonas said that the debt to GDP in South Africa was currently reaching 73%, and the country needed to aim to avoid it reaching 100%. If it did reach 100%, but was supported by growth, then it would be okay, but if there was no growth, this would be a fiscal cliff and there would be a sovereign credit risk. The government would be unable to meet its financial obligations, and this would affect investment. He said that load-shedding and the underperformance of the logistics sector needed to be addressed to solve economic problems.

Dr Mbava, in response to the financial challenges municipalities face, said that the FFC had advocated for a review of the local government fiscal policies.

The Chairperson asked if the departments with which the FFC consulted, heard their recommendations. He acknowledged the FFC’s hard work in completing the presentation, and said that more needed to be done.

He thanked the FFC for their attendance and excused them.

Committee matters

The Committee discussed the minutes of 29 August 2023. Their approval was moved by Ms Tobias and seconded by Mr Mathapha.

The Chairperson asked the Committee secretary for further announcements, who responded by saying that an apology for Mr N Kwankwa (UDM) had been issued during the meeting.

The Parliamentary Budget Office had invited Committee Members to attend a meeting with officials from Gambia between 11 and 14 September. National Treasury had also invited the Committee to attend a virtual public workshop on the tax bill.

The meeting was adjourned.