Division of Revenue Bill; Second Adjustments Appropriation (2023/24 Financial Year) Bill & Gold and Foreign Exchange A/B: PBO briefing

Meeting report

Opening Remarks

The Chairperson welcomed Members and noted that this was a follow-up meeting on the budget presented by the Minister of Finance. He said the 2024 Division of Revenue Bill, the 2024 Second Adjustments Appropriation (2023/24 Financial year) Bill, and the 2024 Gold and Foreign Exchange Contingency Reserve Account Defrayal Amendment Bill were referred to the Committee for consideration. He welcomed the Parliamentary Budget Office (PBO) to share their thoughts on these bills as an independent body.

Dr Dumisani Jantjies, Director, PBO, thanked the Chairperson for the opportunity.

2024 Division of Revenue Bill; 2024 Second Adjustments Appropriation (2023/24 Financial year) Bill; 2024 Gold and Foreign Exchange Contingency Reserve Account Defrayal Amendment Bill

Background

The presentation gave a brief overview of the functions of the three spheres of government, namely: National, Provincial, and Local Government. Some insight was given into the revenue-collecting capacity of each sphere. National government has the highest capacity, followed by provincial, and it is noted that municipal budgets are under enormous pressure.

It is also noted that the 2024 budget projected a medium growth that is slower than required by the NDP. It is also projected to change the current Unified Payments Interface (UPI) outlook slightly, with unemployment and inequality figures worsening over the period of fiscal consolidation.

Situational Analysis

Concerning the national government, it is noted that there is a cost-of-living crisis in South Africa, which has been worsened by crises like the Covid-19 pandemic. Government provides a

monthly grant of R350 that will be received by beneficiaries. This falls short of the inflation-adjusted national food poverty line, which stands at R760 per person per month. Government’s social security system remains a vital intervention to fight the effects of poverty and to increase economic activity.

On the provincial sphere of government, the presentation outlines a concern with the provision of education, indicating a decline in the number of students attending primary school. On the provision of healthcare, it is revealed that 694 newly qualified medical doctors have not found jobs in the public sector since qualifying.

This section also outlines a key function of local government, which is the provision of basic services, noting the importance of this function in achieving national development goals. However, the National Treasury’s 2022 State of Local Government Finances report found that 169 (66%) municipalities were in financial distress at the end of 2021/22.

Division of Revenue

The Division of Revenue Bill provides for the equitable division of nationally raised revenue between the national, provincial, and local spheres of government. It is noted that the government’s stated priority is to enhance spending quality and minimise inefficiency within all budget items, while also ensuring sustainable public finances.

The following section provides some information on allocations, including national allocations per vote, conditional grants transferred from national departments, provincial equitable share allocations, changes to provincial allocations, transfers to local government, and changes to allocation to local government.

Efficiency and Effectiveness

In the presentation, information on provincial expenditure as of 31 December 2023 is provided. On public spending, some government initiatives were outlined, such as the reduction of national and provincial entities. Poor coordination between different programmes within departments and between departments is noted. Also, the ‘social wage’ is declining in real per capita terms. Real per capita spending on function groups, economic classification, health, and education were outlined in the presentation. Some details on the Covid-19 Social Relief of Distress (SRD) grant were provided.

The Gold and Foreign Exchange Contingency Reserve Account (GFECRA)

Some background on the GFECRA was provided, noting that the foreign exchange reserves can be thought of as a form of self-insurance against instability, financial crises and contagion that may harm the South African economy, particularly the financial sector and other businesses. Some principles of the new budget framework are provided, including the three pools, to ensure that funds in the account will always be positive.

The PBO expressed some of its concerns with the GFECRA, notably that the account is earmarked solely for debt reduction.

Second Adjustments Appropriation Bill

The adjustments in allocations are detailed for the Presidency; Cooperative Governance; Home Affairs; International Relations and Cooperation; the Public Service Commission; Public Works and Infrastructure; Women, Youth, and Persons with Disabilities; Justice and Constitutional Development; and Office of the Chief Justice.

Conclusion

The PBO provided some key takeaways from the three bills. It is noted that overall, government aims to increase the proportions of transfers to the provincial and local spheres of government. Furthermore, the GDP outlook over the medium term is significantly lower than the NDP target. While the priority of the bills has been reducing inefficiencies, the reprioritisation of funding shows little evidence of improving spending quality. The PBO expressed concern over governments capability to achieve NDP targets given the decline of real per capita expenditure.

See attached for full presentation

Discussion

The Chairperson thanked the team from the PBO for its presentation. He opened the floor for Members to address the team.

Ms T Tobias (ANC) appreciated the presentation and referring to the conclusion of the presentation, she suggested the Committee hold a session to address what needs to be done to achieve the goals set out by the NDP. She said the presentation did not clarify what portion of the GFECRA will be used to pay the wage bill. She said the presentation points to the challenges of achieving NDP goals, and asked what needs to be done to establish an effective and productive state. For instance, the slow implementation of cabinet decisions, what needs to be done to improve implementation time? All stakeholders need to come together and discuss how a stimulus package can encourage economic growth.

Mr Z Mlenzana (ANC) asked if the equitable share allocations are relevant to the needs and conditions caused by the calamities that took place in the country. He said he was worried about the management of non-expenditures, particularly the cash-flow projections. He felt the District Development Model (DDM) lacks teeth. The DDM is supposed to synergise and coordinate financial management, both horizontally and vertically. On infrastructure development, he asked how PBO can evaluate government performance in this regard. Particularly, how such development can influence employment and economic growth at a domestic level. He asked if these three pieces of legislation realised the SONA injunctions. He asked the PBO to give the Committee an evaluation on non-expenditure, over-expenditure, and general utilisation of its budget. He said this is due to his passion for realising a zero-based budget.

Mr H Mmemezi (ANC) appreciated the presentation as it showed good team planning and a brutal attitude toward government performance. He said government is lacking consequence management and as a result, there is a lack of penalties for bad performance and a lack of rewards for good performance, and the PBO can help in this regard.

Mr O Mathafa (ANC) agreed with most of the points made in the conclusion of the presentation, in particular on the outcomes of the Division of Revenue Bill vis-a-vis the NDP goals. It is important for the GFECRA to be used for strategic allocations to finance fiscal stimulus. He asked what alignment there is between the SONA injunctions and the Economic Reconstruction and Recovery Plan (ERRP). Is there a linkage between the budget and the ERRP? He asked for the PBO’s view on a wealth tax to augment the revenue collection capabilities of government. He asked if the SRD grant should be increased and what the PBO’s opinion is on the basic income grant.

Mr Mathafa asked if the decline of basic services to households was related to the emergence of coalition governments at a local level. For instance, a DA-led administration in Tshwane removed all beneficiaries from receiving basic services and encouraged them to re-register. The registration process is erroneous and too cumbersome for the ordinary citizen. What can be done to avoid this unfortunate situation?

Mr X Qayiso (ANC) agreed that a discussion of the fiscal framework is required. The population has increased yet the fiscal framework still relies on old census data. He said there also needs to be a discussion on the role of the Reserve Bank and the National Treasury can do more in this regard. It can play a more active role in job creation, and its policy mandate should be reviewed. He said they are less concerned with the general information and more concerned over actual expenditure figures regarding the grants themselves. There is a serious problem of underspent grants, particularly regarding agricultural grants such as the Ilima Projects Grant. He expressed that these grants are not being sufficiently utilised and requested the PBO give a breakdown of the areas of concern that result in these unutilised grants.

On the SRD grant, Mr Qayiso said the Department should review the number of beneficiaries to ensure it is inclusive and consistent with its allocation. He appreciated the adoption of the GFECRA Bill, noting it is a positive step. He said that perhaps there should be a framework for GFECRA to be utilised effectively, and he referred to areas that can stimulate the economy and enhance sustainable growth, not only by looking at debt. Infrastructure investment can be a focus area of this account for it to remain sustainable.

The Chairperson said the PBO budgets for free basic services and wanted to understand how only 3.2 million out of 10 million households receive them. The biggest reduction was in public works. What does this say about the commitment to inclusive growth? On changes in the equitable share of local government, the Chairperson said there was a risk of duplication of interventions, especially in public works projects. He asked if there was an issue of double dipping when it comes to the grants.

The Chairperson suggested a project to examine grants to determine how to achieve maximum output. If the GFECRA is not only used for debt reduction, can the budget be spent on other things? On how to use a budget to stimulate growth, the Chairperson gave the example of the Gibela manufacturing plant on which the Committee did oversight. It is an example of government using its buying power to stimulate industry. He asked if the PBO thought the economy was still in recovery mode or if the Treasury could move beyond recovery policies. Has the PBO viewed any signs of potential zero-based budgeting? Could this be a solution to inefficiencies and underexpenditure? The Chairperson opened the floor for the PBO to respond.

Responses

Dr Jantjies thanked the Chairperson and Members for their questions and comments. On a wealth tax, he suggested the Committee invite SARS to provide the status of progress in this regard, as PBO has not done much research into the matter. On the basic income grant, he said that supporting low-income households promotes investments and curbs inequality. On coalition governance, Dr Jantjies said this could be linked to a slower approval of budgets, which is why a clear framework is important. On the ERRP, he said there was no new policy proposals at the SONA and that it is mostly repackaged MTSF and NDP targets. He afforded his colleagues an opportunity to respond.

Dr Nelia Orlandi, Deputy Director: Public Policy, PBO, said more performance information is required to determine what needs to be done to achieve the NDP goals. Currently, the information is not enough to evaluate and monitor the spending of departments. For example, the unemployment outcomes are not conclusively related to the work of departments like the Department of Employment and Labour, the Department of Planning Monitoring and Evaluation (DPME), and Public Works. She questioned whether these departments should be considered the main ones responsible for creating jobs. The PBO outlined all the departments and entities it felt were responsible for skills development in the presentation. The list in the conclusion was presented by the DPME as to the challenges in creating an ethical and capable developmental state. It is unsure how these findings affect the process of budget allocation.

On infrastructure programmes, Dr Orlandi said there is an annexure on budget review in terms of big infrastructure projects. It can be monitored but the PBO does not see the expenditure in terms of the budget. On the linkage between the budget and SONA, she said the focus over the last five years has been job creation and fighting corruption and the budget has responded accordingly, but it is unclear whether it showed results in terms of the expenditure. On zero-based budgeting, she said Treasury indicated it would not be implementing this measure, as Departments do not have the capacity to do so. She said the PBO analysed all conditional grants in terms of their performance and spending. Those documents have been circulated to Committee Members. The shortcomings of the grants were identified, such as their indicators, targets, and other challenges.

On public works reduction, Dr Orlandi said it was mainly for the Property Management Trading Entity (PMTE) and the reduction in budget for various non-state sector programmes. On duplication, she said it could either stop funding to that grant in favour of another that is more capable or focus on building capacity. On the ERRP, she said Treasury monitors big capital projects and is involved in them. The PBO released a document last year on the performance of these projects.

Dr Seeraj Mohamed, Deputy Director: Economics, PBO, said the R150 billion tied to GFECRA is not being spent on the economy. It is used to reduce government debt, which would not affect poverty reduction. On promoting growth, he said the example of Gibela indicates the importance of building dynamism in the manufacturing base. It creates a link to infrastructure development and providing services. Treasury has been arguing that government spending in the economy does not yield that much growth. The PBO argues focusing only on growth that is inadequate. Various factors are involved in growth, such as government investment and household investment in the economy. PBO also critiques the notion that unpaid labour does not contribute to economic growth, because it is not incorporated in the fiscal multiplier of National Treasury.

On the ERRP, Dr Mohamed said the problem with such long-term goals is that they become subsidiary to concerns of expenditure ceilings, surpluses, and debt recovery, rather than seeing it as a recovery process to promote future growth. On the wealth tax, he said the top 1% has a huge share of wealth in the country. 0.01% of the population has 15% of the wealth. The top 1% controls 52% of the wealth in total. The bottom 50% has negative wealth because of debt. There are too few people paying taxes because too few people control a large percentage of their income and wealth. From this perspective, there is a need for redistributive measures. This inequality is a huge constraint to developing the economy in the future.

Ms Kagiso Mamabolo, Economic Analyst, PBO, said in addition to the erroneous registration process, the money going towards basic services is misallocated. Municipalities tend to divert these funds to pay for other expenses. The PBO encourages mechanisms that promote accountability in municipalities so that funds can be utilised for indigent households. The reduction in budget for public works has also had an effect on the provision of basic services.

Ms Sibusisiwe Sibeko, Public Finance Analyst, PBO, said National Treasury should be questioned on the impact of the multiple disasters faced in the country in the last few years on budget allocation. When it comes to disasters, the backlogs that occur as a result should also be considered. Allocating money does not account for these backlogs. There needs to be a focus on building resilience, which requires proactiveness towards disaster response. On the SRD grant, she said PBO never commented on how much the grant should be but has always found that R350 per person is not enough. It has asked Treasury what the impact of the SRD grant is on the economy, as no such assessment has been done. In 2020, the SRD reduced poverty by 5.3% and household inequality by 1.3-6.3%. More studies like this are required to indicate the broader impact of such a grant on economic stimulus. Income grants need to be thought of through a gendered lens, as women are disproportionately represented in unemployment statistics.

On underspending, Ms Sibeko said the question needs to be asked ‘are Departments underspending because they do not have enough allocation or are there other systematic reasons?’ Cutting expenditure does not solve the issue of underspending, it just removes valuable resources. Departments need to be more critical over the root causes of underspending.

Dr Jantjies said high interest rates over the last few decades have severely impacted investments. Further, price stability is an important target when considering macroeconomic variables like unemployment and inequality. There is also a need for clear targets on employment and growth. On underspending, he said he is concerned with entities feeling the need to save. There needs to be a balance between cutting expenditures and encouraging entities to spend their budget allocations. This is particularly true in the service delivery sector, where entities need to feel free to spend money on services. The wage bill should not be seen as just an expenditure to support households; it is a part of service delivery that can contribute to growth. On duplication, Dr Jantjies said one particular programme the PBO looked at was public unemployment. There are so many programmes addressing this issue and perhaps there is a need to centralise these efforts into one programme.

The Chairperson asked if there were any follow up questions.

Ms Tobias said her comment about the wage bill was taken out of context as she wanted to address the matter to see if the PBO is achieving its targeted goals or not. These targets should be juxtaposed with the allocation of funds. There is a difference between using reserve funds and spending your allocated budget. There is nothing inherently wrong with increasing wage levels, but it should be based on productivity levels.

The Chairperson thanked Ms Tobias and asked the other Members if they had any follow up questions. He also asked if National Treasury was too aggressive in trying to attain the primary balance of the budget in the next fiscal year.

Dr Mohamed said he was unsure if he understood Ms Tobias correctly, but she seemed to suggest that money from GFECRA would be used to pay the wage bill and all of the funds would go toward paying debts. The PBO has been stressing for a while that trying to achieve a surplus is not the right fiscal policy approach for a developing country. There is too much of a need for building the engine of growth for the economy. This includes everything from infrastructure to diversifying the country’s industrial base. A strong developmental state is needed to play an active role and work with the private sector to achieve economic development. Through that process, there could be an increase in investment and employment and a reduction in the need for grants. Government can then also enhance basic services through this process, as was done in China with their high-speed railway network. This not only benefits households but the whole economy.

Dr Orlandi said the division of revenue diagrams in the presentation was a good illustration of changes in local government revenue over time. In future, illustrations should include revenue collected by local government.

Ms Sibeko said allocation of the SRD grant determines the number of beneficiaries, and not vice versa. Whether allocation or beneficiaries should come first is a critical question the Committee must ask. On budget surplus, she said the reason the PBO does the real per capita analysis is to show the effects of budget cuts on real expenditure. The primary budget surplus needs to be considered in terms of long-term costs. The literature shows that austerity has worsened existing inequality. Long-term human costs need to be considered when assessing a budget surplus.

Dr Mohamed said that a framework for guiding the use of funds flowing to National Treasury is a waterfall into free pools, creating a system of guarding against government and Treasury going to GFECRA if it shows a bigger reserve. Firstly, they need to make sure the reserve is a certain size. Secondly, the South African Reserve Bank (SARB) needs to make sure they are covered as they will pay interest to the banks. Finally, if there is anything left, it will be distributed to National Treasury. Given the current situation, it does not seem it is going to be a lot of money for some time.

Dr Jantjies thanked the Committee for their guidance and hopes to continue working closely with it in the future. He thanked the Chairperson for the opportunity.

The Chairperson thanked Dr Jantjies and his team for their engagement with the Committee over the past five years. He said economics is not a natural science, and as such, there can be many different views on the same topic. Economics is also class-orientated, as trade and fiscal policies reflect the dominant class. He wished the PBO good luck in their future endeavours. The Chairperson moved on to the next agenda item, which was the adoption of the minutes. The minutes of the meetings of the 14th and 27th of February are adopted.

The meeting is adjourned.