Appropriation Bill: FFC briefing

Meeting report

The Chairperson welcomed everyone present at the meeting. He indicated that the Committee planned to have two more sittings on Wednesday and Friday.

Thereafter, he requested a mover to adopt the agenda.

Mr W Douglas (MK) moved for its adoption.

Ms M Bartlett (ANC) seconded the mover.

The agenda was duly adopted.

The Chairperson asked if any apologies were received.

Mr Darrin Arends (Co-Committee Secretary) said no apologies were recorded.

Mr Andries Maubane (Co-Committee Secretary) mentioned that the Committee received an apology from the Chairperson of the FFC, Dr Patience Mbava, who had suffered a bereavement.

The Chairperson noted the apology and asked for the Secretariat to extend the Committee’s condolences to Dr Mbava.

Given that it was the Committee’s first engagement with the FFC, he asked that the officials introduce themselves.

Mr Thandokuhle Ngozo (Senior Researcher: Macroeconomics and Public Finance at the FFC) introduced the FFC delegation to the Committee.

FFC Submission on the Appropriation Bill for the 2024-2025 Financial Year

Mr Ngozo, Mr Khutso Makua (Researcher at the FFC), and Ms Sasha Peters (Programme Manager: National Appropriations at the FFC) took the Committee through the presentation.

Overview of the 2024 Fiscal Framework

Mr Ngozo informed the Committee that the budget deficit for 2023-2024 has been revised upward to 4.9% of gross domestic product (GDP) compared to the previous estimate of 4% in the 2023 budget. A consolidated budget deficit of 4.5% is projected for 2024-25, narrowing to 3.3% of GDP by 2026-27. Furthermore, the projected revenue for 2023-2024 is R46.5 billion, lower than the 2023 Budget estimates. The 2024 Budget forecasts revenue to be R1.815 trillion for 2024/25, which is R53.1 billion less than projected in the 2023 Budget.

The large projected revenue shortfalls over the Medium-Term Expenditure Framework (MTEF) reflect the country’s weak economic conditions and lower consumer demand, which has resulted in a decline in corporate tax and value-added tax.

Gross borrowing is set to increase from R332 million in 2024-2025 to R424.7 billion in 2025-2026 before declining by R279 billion in 2026-2027. To cover a portion of the borrowing requirement, the NT tapped into the government’s Gold and Foreign Exchange Contingency Reserve Account (GFECRA), which is projected to reduce the borrowing requirement by R150 billion in the medium term. While the FFC supports this move, it stressed the need for the government to implement structural reforms to the economy to kickstart economic growth.

Revenue trends and tax proposals

Ms Peters indicated that tax revenue is set to be R1.73 trillion, R56.1 billion less than in the 2023 budget. However, tax revenue is expected to increase by R45.6 billion over the medium term to R1.73 trillion.

The majority of state-owned companies (SOC) experienced declines in the value of their assets, which require fiscal transfers to cover losses and pose a risk to the fiscus.

2024 Appropriation Bill: Selected vote allocations and growth

Mr Makua indicated that the total appropriation by vote for 2024-2025 amounts to R1.102 trillion and will increase in 2025-2026 to R1.116 trillion and R1.158 trillion in 2026-2027. From 2024-2025 to 2025-2026, social development expenditure is expected to decline by 6.4% from R27.5 billion to R25.7 billion, whereas this is expected to increase for cooperative governance from R125.18 billion to R131.12 billion.

The FFC was pleased with the decision to protect equitable share allocation and further noted the reprioritisation of the direct to indirect components of the municipal infrastructure grant (MIG) and the regional bulk infrastructure grant (RBIG).

While the entity welcomed the loan scheme for the missing middle in the new Comprehensive Student Funding Model (CSFM), the commission worried whether it would be successful given the decreasing government budget and the ongoing challenges of the National Student Financial Aid Scheme (NSFAS).

The FFC raised its concern about the R400 million reduction in funds for the Ilima/Letsema grant, considering its emphasis on food production, to the Community Works Programme (CWP) and Expanded Public Works Programme (EPWP), and the R8 million reduction in funds for the EPWP.

The Commission called for greater assistance to be provided to smallholder farmers so that they can take advantage of technological advancements in their sector.

The Commission also stressed its long-held view that the mandates of the Departments of Trade, Industry and Competition (DTIC), Employment and Labour (DoEL), and Small Business Development (DSBD) were duplicated. It is recommended that these be aligned going forward.

(See Presentation)

The Chairperson asked the FFC to provide two examples of its submissions having had a profound impact on the nature of the NT’s tabled budget both in February and during the Mid-Term Budget Speech (MTBPS)—by law, the Commission is empowered to make submissions on both.

Mr Ngozo said the FFC welcomed the NT’s decision to tap into the GFECRA to cover a portion of the country’s borrowings, as it would assist in managing the government’s debt levels. However, the entity noted that this was not sustainable in the long term. It proposed that utilising the country’s foreign-exchange reserves should not substitute the need for the government to implement structural reforms to manage public finances properly.

The Chairperson believed that his question would be important in framing future engagements between the Committee and the FFC. He underlined the serious need for Parliament and by extension, the Committee, to take forward the FFC’s recommendations so that they can have a substantive and consequential impact on appropriations.

What could not happen, he stressed, is a situation where a budget is tabled and there are attempts to align objectives to that budget without questions being asked on what those objectives were and if there was a budget to support them in the first place. For instance, there will be budget implications if the National Development Plan (NDP)’s objective of achieving 5% economic growth is not met by 2030.

Thereafter, he opened the floor for discussion.

Discussion

Ms H Neale-May (ANC) asked the FFC why tax revenue in 2023-2024 would be R56.1 billion less than in the 2023 Budget, yet there was a projected increase of R45.6 billion in the medium term relative to the 2023 MTBPS. What is the Commission’s opinion on the risk posed to the country’s foreign exchange reserves after the NT’s decision to set aside R150 billion to cover borrowings? What was the purpose of indirectly channelling the MIG and RBIG instead of providing them directly to the provincial and local government spheres? What did the FFC think of the idea of moving the function of medico-legal claims from departments to the State Attorney’s Office? Is the NSFAS managing the CSFM would be a good idea, considering the multiple challenges it is facing?

She was pleased to hear that the equitable share allocation had not faced any budget cuts, as it provides vital support to indigent municipalities. At the same time, she raised her concerns regarding the decrease in allocation to the EPWP because of the number of jobs and opportunities it has created for individuals to obtain skills and earn a living.

Mr Douglas asked the FFC how the 2024-2025 budget specifically addresses the alignment of South Africa’s fiscal policies with the broader pan-African goals of economic integration, poverty alleviation and infrastructure development; and whether it was aware if mechanisms would be put in place by government departments and municipalities to ensure that there is transparency and accountability in the use of the MIG and the disbursement of disaster relief funds; and what action was being taken against those responsible for the mismanagement of these funds.

He was not satisfied with the Department of Cooperative Governance and Traditional Affairs (DCoGTA) budget allocation to kings and queens and the restitution of land, especially for the Khoi, San, and indigenous African communities.

With the budget cuts to the EPWP, which has already struggled to provide sustainable jobs and adequate training for participants, he wondered when the Commission planned to step in to ensure that this and other programmes assist in reducing unemployment and provide meaningful economic opportunities for citizens.

Ms N Gcaleka-Mazibuko (ANC) stressed that the resources must be properly managed and used to support the government’s objectives and to fulfil Parliament’s vision of improving the lives of all citizens.

She agreed with the FFC that very little support was being provided to emerging farmers to enable them to take advantage of technological advances. She suggested that resources from the administration be redirected to the Department of Agriculture, Land Reform, and Rural Development budget.

Thereafter, she asked if the FFC’s recommendations would be implemented by the NT and, where they had not, what recourse it had. Most of the issues highlighted by the FFC concerned the current state of the country’s finances and what issues required attention.

In a meeting between the Standing Committee for Finance and the NT the prior day, mention was made of the DCoGTA’s equitable share allocation. She asked what the basis and rationale of the formula was, as it has been under review for over the years – which has not yet been completed. In addition, she requested that the Committee consider calling the FFC and NT for the latter to present on how to improve on the equitable share allocation, given the economic inequalities between provinces, and the fiscal gap between the three spheres of government, with municipalities receiving less than 9% of the equitable share and the conditional grants.

Ms H Hlonyana (EFF) was concerned that even though significant sums had been spent on the FFC, the NT, at times, did not take into regard its recommendations. She called for the government to start taking them into account more often.

Afterwards, she asked the FFC to clarify what it meant by its suggestion for the government to better align the mandates of the DTIC, DSBD and DEL. What action did the FFC believe the government should take to reduce the country’s high debt levels? How could structural adjustments be made without negatively impacting financially strained citizens from incurring additional costs to servicing the country’s debt, most of which was due to the theft of funds by the government? What did the FFC mean by its statement of the need to reposition the country through an industrialisation programme, and did the entity have any recommendations on how the government can mitigate the effects of another Covid-19-like pandemic?

She pointed out that despite being one of the richest countries in terms of commodities, many of its citizens continued to live below the poverty line.

Mr M Lekganyane (ANC) asked the FFC if there was a proposal in the government to review the equitable share funding formula so that it is informed by the spatial disparities, not only in relation to population demographics but also between localities. Such a proposal would be significant, as the country continues to face high levels of inequality, poverty and unemployment, all of which were not an accident of history but deliberately created by laws promulgated by the Apartheid government, he argued. To him, it seemed that in most cases, the government’s allocation of resources has been slightly cosmetic.

Thereafter, he asked the FFC to elaborate on what it believed were the structural impediments to the country realising inclusive socio-economic development, and how it thought the government’s resources could be used to achieve that goal.

Mr K Wakelin (DA) asked how the Committee would ensure that the department and Parliament take the Commission's recommendations more seriously going forward.

He asked if the FFC had a suggestion for a separate model the government could use to better service its high debt costs.

The Chairperson said Members would be given their first opportunity to understand the 7th Administration’s objectives during the Opening of Parliament Address on Thursday evening.

He echoed members’ views that the question on the FFC’s recommendations should be resolved speedily. In fact, the Committee’s first mandate, he said, would be to ensure that the FFC’s mandate is properly carried out.

He argued that ensuring that budget allocations are correctly spent by departments and municipalities and the Committee’s oversight over the implementation of budgetary recommendations to the government to obtain value for money is critical.

Afterwards, he asked the FFC what powers it had to follow up on whether its recommendations have been taken into consideration by the NT, as it has already been given a profound role to make input on appropriations bills before they are passed; for the FFC to provide it with guidance on some of the issues raised by the Committee on the budget so that it is able to make inputs in the next phase of the budget cycle that it can monitor as part of its oversight responsibilities; whether the NT is currently considering zero-budgeting; what the entity’s thoughts were on the argument made for the government to increase its spending, through higher borrowings, on strategic areas of the economy; what the FFC’s view was on the South African Reserve Bank (SARB)’s monetary policy on inflation; and how it believed the government could stimulate growth in the country.

He felt that the last question was important and required deeper thinking on how the government can avoid making the same mistakes it has in the past.

While he was fascinated by the FFC’s proposal for the government to establish a state-owned holding company, he wondered if having a new SOC would assist in addressing the challenges faced by existing SOCs and what the budget implications would be.

Mr Ngozo pointed out that the Minister of Finance (MoF) is legally obligated to take the FFC’s recommendations into consideration, as he did with the annual submission made by the entity last year, ten months before the 2024 Budget Speech. The submission is usually presented ten months before the next budget to give the Minister enough to look into and consider the recommendations made and elaborate on which recommendations he or she accepted or rejected and the reasons for either decision.

Over the 30 years of democracy, the FFC has contributed to the NT’s work. One of its contributions was to help design what is known as the provincial equitable share, where it recommended the formula and components – education (accounting for 48% of the formula), health (accounting for 27% of the formula), institutional, poverty and economic activities – that were to be used, he told Members.

It also played a role in the design of the local government equitable share – which is made up of 5 components: basic services, governance capacity, institutional, community service, revenue adjustment, and stabilisation – the formula-based approach it uses, and the concept of costs and norms. There is an ongoing debate on the relevance of the formulas as they were designed a while ago. The FFC has recommended overhauling the entire system and that there be an engagement between it, the NT, the South African Local Government Association (SALGA) and other relevant stakeholders on this proposal.

At the core of this discussion is how to divide the revenue raised nationally amongst the three government spheres, he added.

On what the entity meant by the need to reposition the economy, he said the literature has shown that the country’s economy is commodity-based. As such, the FFC believes that there have to be new drivers for the economy which speak to the green economy, but that can only happen if the country reorientates its industrial policies to procure green technologies like battery storage. The entity further argued that the country’s manufacturing sector considers how goods are produced for the country and the rest of the world, he added.

Referring to the question on the FFC’s view on SARB’s monetary policy, he said the entity supported the SARB’s inflation targeting, which has also protected the value of the Rand, and did not believe there was a need to change the bank’s monetary policy stance.

Ms Peters, in response to the purpose of the indirect grant, explained that national departments establish indirect grants where they believed provinces or municipalities did not possess the capacity to spend the funding allocated. A few years ago, the FFC conducted an assessment of the performance of indirect grants, and it found that national departments are not better able to implement a programme or spend money than provincial departments or municipalities. However, there are instances where the national government can assist.

The FFC thought that in cases where an indirect grant has to be provided, a time frame must be given on how long this would be the case, and a plan must be put in place to ensure the transfer of skills such that provinces or municipalities can take over the running of the grants and the spending thereof, she said.

On whether the entity thought having NSFAS manage the CSFM would be a good idea, she indicated that when the Minister outlined the department’s plan for the missing middle in January, he said NSFAS would oversee the implementation of the CSFM. She admitted that the FFC was worried about NSFAS’ ability to efficiently and effectively manage this additional responsibility as it is currently under administration and facing a number of investigations.

Regarding when the Commission planned to step in and ensure programmes like the EPWP provide meaningful economic opportunities for citizens, she said the FFC recommended that skills training provided through public employment programmes be meaningful so that participants can find or create employment opportunities post-training. The FFC believed it would be good for job creation to be one of the EPWP's measurable outputs.

She agreed with Members that small emerging farmers had not been given enough support thus far, with under 2% of provincial resources allocated to agriculture. One of the issues is that the Department of Agriculture’s limited resources are thinly distributed across an increasing number of beneficiaries, which does very little to assist the sustainable development of farmers, she argued.

On the proposal for medico-legal claims to be a function of the State Attorney’s Office, she acknowledged the big risk these claims pose to the health budget. The FFC found significant growth between the 2012-13 financial year and 2022-2023 in expenditure on medico-legal claims from R265 million to R1.5 billion – this information was captured in the annual submission it recently tabled – with the Eastern Cape, Gauteng and KwaZulu-Natal accounting for more than 70% of this expenditure.

While the FFC noted the critical role the State Attorney’s Office played in assisting departments in defending against opportunistic claims and other cases, it did not support removing this budget responsibility from the Department of Health, as it may undermine the department’s willingness to take necessary to improve on service delivery and to be held account when not doing so.

Touching on what the FFC meant by its suggestion for the government to better align the mandates of the DTIC, DSBD, and DEL, she stated that the entity looked at the departments within the economic development space that are supposed to play a powerful role in facilitating growth in the country and noted the overlap in their mandates. Moreover, the budgets of these departments were either cut or showed marginal year-on-year growth. The FFC believed that this necessitated a relook at how they have been capacitated against the important roles they play.

She clarified that the entity has not yet considered whether the departments should be amalgamated or not.

The key theme running throughout the FFC’s analysis is the need for strong and robust oversight to be picked up so that mitigation strategies can be implemented to address them as soon as possible.

In response to the question on the mismanagement of the MIG, Mr Makua said the FFC had raised concerns around not only the mismanagement of the MIG but also how municipalities choose to spend it. Individual municipalities needed to be engaged to better understand the root causes of the mismanagement because it was critical for municipal infrastructure upgrading and maintenance. Where irregularities have been detected, those responsible should be held accountable, he stressed.

Adding to the responses made on the equitable share formula, he indicated that a review of the formula is currently underway between a number of stakeholders, with a number of its objectives and components being looked at. The FFC believes that the most important thing is to make the formula as flexible as possible so that it can better respond to the needs of individual municipalities. Demographics will also have to be considered, given the spatial inequalities and socio-economic disparities between municipalities in the country, he said.

He added that the review will strive to ensure equity in the horizontal allocation to local government, which will show in the formula's institutional and community services components.

Closing remarks by the Chairperson

The Chairperson mentioned that the Committee will eventually set out its own objectives and decide which areas of government need additional spending, possibly influencing the budget going forward. This would also further the Committee’s duty to improve accountability.

He noted Members' questions about reviewing the equitable share formula and the suggestion that the FFC and NT engage jointly on the matter.

He asked that the Committee researchers look into the recently reported concerns about the accuracy of Census 2022 because the alleged mistakes could impact budgets.

He also noted the question of how the government could develop inclusive socio-economic development objectives. He felt that it would be important for the Committee, after concluding its planned engagement with the Parliamentary Budget Office (PBO), to express its opinion on the government’s likely failure to reach some of the targets set out by the NDP, given the negative economic trajectory in the last ten years.

NSFAS being under administration caused a challenge, he stressed, and raised the question of whether it would be better to create direct transfers to institutes of higher learning rather than having an agency manage and administer the funds. He proposed that the Committee call NSFAS to appear before it in the near future.

After those remarks, he thanked the FFC for the engagement and allowed them to leave the meeting.

Thereafter, he announced that the public hearings on Friday may be affected by the 10:00 starting time of the debate on the Opening of Parliament Speech. Given that, he proposed that the Committee meet earlier at 08:00 a.m. for either a two- or three-hour meeting. He asked for Members' thoughts on his proposal.

Dr M Burke (DA) supported the Chairperson’s proposal and proposed that the Committee meet for two hours, as members of the Democratic Alliance would have to attend the debate at 10:00.

Ms Bartlett also supported the Committee meeting from 08:00 until 10:00 on Friday.

The Chairperson noted the input from Members and committed to sending out communication by the end of the day at the latest.

The meeting was adjourned.