Division of Revenue A/B, Adjustments Appropriation Bill & Eskom Debt Relief A/B: FFC briefing

Meeting report

The Chairperson expressed the Committee’s displeasure at the late documents submitted by the Financial and Fiscal Commission (FFC). It had requested the documents from the previous Friday, but had received them only on Tuesday, the day before the meeting, so there was not enough time to look through them. He asked the FFC to correct this matter going forward.

FFC on economic prospects

Dr Patience Nombeko Mbava, Chairperson, FFC, started off by apologising for the late submission of the documents, and assured the Committee that it would not happen again. She would be joined by three researchers who would be assisting her in giving the presentation -- Ms Sasha Peters, Mr Thando Ngozo, and Mr Siyanda Jonas. The presentation had been shared with all the Committee Members.

Highlights of the presentation were:

• Global growth was projected to fall from an estimated 3.5% in 2022, to 3.0% in 2023 and  2.9% in 2024. 
• There would be a rise in central bank policy rates to fight inflation. The Russia-Ukraine war, China's real estate crisis and the Israel-Palestine conflict, would weigh on economic activity.   
• Inflation remained high and continued to erode household purchasing power, though it was expected to moderate from a peak of about 8.7% in 2022 to below 6.8% in 2023.
• Energy and food prices had slowed from their 2022 peaks, although food prices remained elevated.
• Geopolitical tensions linked to the Israel-Palestine conflict may disrupt the positive trends of decreasing inflation and stabilising prices.
• The real gross domestic product (GDP) had increased for two consecutive quarters. It had increased by 0.4% in the first quarter of 2023, and by 0.6 % in the second quarter. However, the combination of external and domestic risks meant low growth would likely persist and may have a defining impact on public finances.
• Domestic factors such as the electricity crisis, deteriorating infrastructure and other long-standing structural challenges were likely to weigh in on growth prospects. In August, the annual consumer price inflation stood at 4.8%, and in September, it had increased to 5.4%. 
• During the peak of inflation, the South African Reserve Bank (SARB) increased interest rates to stabilise prices. However, the increase in interest rates would increase South Africa’s debt servicing costs, thus requiring policymakers to strike a balance between growing debt in the face of rising inflation.
• Long-standing structural challenges continued to impact growth and undermined progress in reducing poverty, unemployment and inequality.
• The official and expanded unemployment rates had not yet reverted to pre-pandemic levels. The official unemployment rate had decreased to 32.6%, and the expanded unemployment rate had decreased to 42.1%.

Regarding the fiscal framework adjustments, the fiscal situation was weaker than the 2023 Budget due to rising public sector wages, growing debt service costs, and the extension of the Social Relief of Distress (SRD) grant. Despite attempts to cut spending, fiscal sustainability had not been restored. Reductions in front-line services had also proven insufficient in addressing the underlying macroeconomic challenges that South Africa confronts, thereby impeding the achievement of fiscal consolidation.

Sluggish growth and structural inefficiencies hindered fiscal sustainability. A comprehensive approach was needed beyond austerity measures and general reforms. Failing to meet fiscal targets damaged credibility and had wide-ranging implications. It hampered government's ability to restore sustainability and weakened fiscal policy as a tool for stability.

2023 Adjustments Appropriation Bill

The FFC made the following comments on the 2023 Adjustments Appropriation Bill:

• Net in-year spending adjustments for 2023/24 amounted to R10.3 billion, thus taking the total adjustments expenditure estimate from R2.034 trillion to R2.044 trillion.
• Adjustments to spending were largely driven by costs associated with the 2023 wage agreement and increases in debt service costs. To assist with catering for these pressures, the 2023 Adjustment Appropriation Bill recorded a net downward adjustment amounting to R12.4 billion, thus taking the total adjusted appropriation down to R1.065 trillion, from R1.077 trillion recorded in the 2023 estimates of national expenditure (ENE).
• The bulk of the adjustments (R18 billion) arising due to the wage bill agreement were required at the provincial level, and were in respect of the provincial education (R11 billion) and health (R7 billion) departments. This was included in the provincial equitable share (PES) allocation as part of the adjustments to the direct charges against the National Revenue Fund (NRF). The balance of R6 billion, largely for the police vote, was required at the national government level.
• R1.6 billion was categorised under the unforeseeable and unavoidable expenditure category, and was aimed at providing assistance for damage caused by the floods. The Commission welcomed the financial support to assist in rebuilding damaged infrastructure. To ensure minimal delays and quality in repairing and rebuilding damaged infrastructure, Parliament should receive regular updates on progress.
• In-year adjustments in respect of rollovers amounted to R578 million. The responsible departments were Home Affairs (R578 million) and Basic Education (R236 million).
• Rollovers had arisen due to slow spending within departments. Within Basic Education, rollovers were related to the school infrastructure backlog grant and workbooks. Slow spending regarding key education inputs such as infrastructure and learner/teacher support material (LTSM) was concerning, especially in light of the constraints that were likely to face provincial education departments over the medium term expenditure framework (MTEF). Against this background, all efforts should be undertaken to ensure that service delivery performance related to the delivery of critical, non-personnel educational inputs is optimal.

2023 Division of Revenue Amendment Bill

The FFC commented on the 2023 Division of Revenue Amendment Bill on the provinces:

• The total allocation for provinces -- Provincial Equitable Share (PES) and conditional grants -- was projected to increase marginally and below inflation between 2023/24 and 2024/25, with a nominal increase of 2%, from R706.4 billion to R720.5 billion.
• Growth in the allocation for provinces in the outer years of the 2024 MTEF remained very low at 4.4% and 4.27% in 2025/26 and 2026/27, respectively. This indicated that provinces were likely to remain under financial constraints for a longer period, which would present a challenge with respect to their ability to respond and catch up with increasing pressure due to expenditure needs in a number of areas, including education and health.
• The equitable share to provinces was expected to increase marginally, from R585.1 billion in 2023/24 to R589.5 billion in 2024/25. This represented an increase of R4.4 billion, which was a nominal increase of 0.75%.
• The key driver of this marginal increase in the PES funding was the compensation of employees (CoE), particularly in the education and health sectors. It was therefore important to note that the additional funding of R68.2 billion over the 2024 MTEF was not meant for any improvement in service delivery. 

Eskom Debt Relief Bill

Government guarantees to state-owned entities (SOEs) remained a significant risk, as many were in poor and deteriorating financial positions, which heightened the risk of these liabilities materialising. Over the past decade, there has been a significant decline in the performance of major SOEs amidst increasing operational costs, falling net profits and increasingly unsustainable debt levels. High debt-service costs and employee compensation were two key factors driving up operational costs in SOEs, reducing their ability to generate profits. Low levels of demand and economic growth in the post-COVID-19 environment had also strangled revenue growth for most SOEs.

The Minister of Finance had not yet clarified the Eskom debt relief conditions. Historically, debt bailouts to SOEs had continuously failed to address the underlying structural issues that had led to their poor performance, raising doubts as to whether the debt relief would improve its operational performance over the long term. The conversion of the Eskom debt to an interest-bearing loan meant that Eskom would be obligated to pay interest, in addition to repaying the principal amount. The impact this would have on the fiscus would depend on the interest rate specified in the loan agreement and Eskom’s ability to service interest payments on the loan. Without significant structural reforms that address the root causes of its financial and operational challenges, it was unlikely that the entity would be able to service these debt obligations. 

See attached for further details

Discussion

The Chairperson thanked Dr Mbava and her team for the detailed presentation, and opened the floor to questions.

Ms T Tobias (ANC) said that the FFC was like a think tank of the South African government, so the expectation was that it made meaningful contributions towards the policy stances that government took. To what extent did it influence fiscal policy? The issue of fiscal sustainability has occurred on many occasions, as well as the recommendations on fiscal consolidation. There had been a suggestion that the growth rate should be at 1% to realise a surplus, given the geopolitics -- was there a specific policy proposal, apart from fiscal sustainability, that could see growth going to at least 3%, as well as having a surplus and reserves?

Mr Z Mlenzana (ANC) asked Dr Mbava what her view was regarding baseline budgeting as opposed to zero-based budgeting. How did she feel about the budget reductions, and what was her take on the cuts in the Department of Education? Could the FFC share its view on spending, non-spending, job creation, unemployment, and the general economic recovery, on economic development? What were the general expenditure trends in municipalities, and did they have -- and maintain -- their asset registers? Did they know the age of their assets so they knew when and how to maintain them?

Mr O Mathafa (ANC) asked if the trajectory of the MTPBS showed that there would indeed be surplus to cushion the impact of the rising debt and related costs.

The Chairperson expressed his worry about the debt stock of the municipalities. He asked what the debt-to-GDP ratio of municipalities was. How much debt was due for redemption in the 2023 financial year? In the presentation, a point was made that the FFC was pushing infrastructure-led growth, despite the failure of infrastructure to perform -- what was the FFC proposing? Lastly, a valid argument had been made that although both the equitable share and conditional grants were increasing, this was not in real terms. The Committee called for additional funds so that when they were increased, they did so in real terms. Where could this money come from? What should the role of the municipality be in ensuring that there is economic growth?

FFC's response

Dr Mbava thanked the Committee for their questions, and said she would ensure that responses for the ones that she was not able to answer, would be sent in writing at a later stage.

Mr Jonas said some constraints inhibited the economy from growing, such as load-shedding, which could affect investment decisions, especially those that relied on energy. In the logistics sector, there were a number of challenges, specifically ones that affected Transnet. There were also long-standing structural issues that impacted South Africa’s growth potential which had to be addressed, such as poor educational outcomes, the lack of competitive markets, high barriers to market entry, and poor network industries.

Mr Ngozo spoke on what could be done over and above fiscal sustainability and fiscal consolidation, and a specific policy proposal for growth as well as the primary surplus. Growth was being undermined by South Africa’s energy supply, which affected productivity. Secondly, how could production be taken from the production line to the market with the rail and transport logistics sector not working? There was therefore a problem with growth that was structurally low because it was undermined by the energy supply as well as the logistics sector.

He said a surplus was unlikely to materialise because when analysing the situation, growth would, in the medium term, remain lower than the real interest rate, meaning that the ability of the government to stabilise debt was questionable. A coherent microeconomic policy was needed to ensure that even fiscal consolidation was included in what the FCC wanted to achieve. Regarding baseline versus zero budgeting, it was important to know that baseline budgeting was a form of budgeting that was built on the previous budget. One would look at what was previously allocated, and proceed to go off from there, whereas zero-based budgeting required one to start afresh. The FFC found that baseline budgeting was easier to implement, because it meant building on the past, whereas zero-based budgeting was complicated because in justifying each budget line, they would have to look at a number of things.

Regarding the spending and non-spending on infrastructure, infrastructure spending was positively linked to growth. However, the challenge was that many infrastructure projects had not been well packaged to be implemented. The result was that the benefits South Africa should be seeing from infrastructure spending were non-existent.

Ms Peters referred to the decreases due to non-spending, and said cutting was not a long-term sustainable solution to the underspending of conditional grants. Conditional grants were instituted to drive the implementation of national priorities. Section 154 of the constitution compelled national and provincial governments to evaluate the driver of underperformance, and to assist sub-national governments to effectively undertake their constitutional obligations. Also, concerning the infrastructure, apart from packaging, the government needed to invest in sectors most likely to impact economic development. As long as government continued to rely on failing and underperforming SOEs to drive infrastructure investment, it would face problems. Factors that could assist were skills development and strong monitoring and evaluation.

Dr Mbava addressed the fiscal framework and its credibility. It would be credible if the policy objectives that had been agreed upon for the next four years were going to be achievable. Looking back over the last two years, despite implementing austerity measures and reductions in expenditures, the desired outcome of restoring the fiscal sustainability path had not been met because fiscal risks had come into the fold.

She said the FFC would send detailed written responses to all the questions that they had not been able to answer in the meeting.

Chairperson's closing remarks

The Chairperson thanked everyone for their engagements, and encouraged the FFC to go back and review the responses to the questions they were unable to answer, and send them in a written response as soon as possible. Social sciences were not straightforward or black and white -- there were always different perspectives and opinions -- so to go and return for further discussion was not a bad thing.                 

The meeting was adjourned.