Appropriation Bill: FFC briefing

Meeting report

The Chairperson welcomed all those who were present in the meeting.

The previous day, the Committee was briefed by the NT on the crucial Appropriations Bill for 2024, marking the initial phase of the process, she said. Today’s meeting marked the next phase, where the Committee would be engaging with the FFC to gather its insight on the Bill. The sitting was essential in laying the foundation for the forthcoming series of public hearings between the Committee and civil society organisations.

She added that the FFC serves as a constitutional body tasked with providing recommendations to Parliament, through this Committee, and provincial legislatures on key matters such as revenue allocations, equitable share, government guarantees, and municipal fiscal powers and functions.

After making those brief opening remarks, she asked for the FFC Chairperson to introduce her delegation.

Mr Thandokuhle Ngozo (Senior Researcher: Macroeconomics and Public Finance at the FFC) tabled an apology on behalf of the FFC Chairperson, who had recently suffered a bereavement.

The Chairperson extended the Committee’s condolences to the FFC Chairperson.

After doing so, he introduced the delegation to the Committee.

FFC Submission on the Appropriation Bill for 2024-2025

Mr Khutso Makua (Researcher at the FFC), Mr Ngozo, and Ms Sasha Peters (Programme Manager: National Appropriations at the FFC) took Members 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 of 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 to 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 kick-start 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 SOCs experienced declines in the value of their assets, which require fiscal transfers to cover the losses, posing 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 welcomed the 34% increase in early childhood development (ECD) grant for 2024-25. However, it questioned the shifting of R1 billion from the ECD grant to the Department of Basic Education (DBE).

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

Despite expressing satisfaction with the extension of the Social of Relief Distress (SRD) Grant to support those in need, the FFC noted the importance of the government finalising its stance on an impactful and sustainable support structure to relieve socio-economic distress.

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

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

(See Presentation)

After the presentation, the Chairperson asked the FFC to provide insight on how the proposed allocations in the Bill may impact different sectors of the economy and address any potential disparities; what ways it believed the Committee would collaborate with it to ensure that the Bill reflects the national priorities and addresses key fiscal challenges; and how the current Bill aligned with the recommendations provided by the entity in terms of revenue allocations and fiscal challenges.

Thereafter, she opened the floor for discussion.

Discussion

Ms A Siwisa (EFF, North West) asked the FFC what the abbreviation GFECRA stood for, and what the terms and conditions of the GFECRA settlement were; what guarantees there were that SOCs would be able to improve their performance given the extent of mismanagement they suffered under the Department of Public Enterprises which strained their finances; whether beneficiaries of the Ilima/Letsema Grant were provided market access to sell their agricultural products in large retail stores; whether the Minister was correct in her statement during the budget vote speech that the Department of Water and Sanitation (DWS) was only responsible for the maintenance of dams and not the supply of water to households.

She stressed the need for the government to allocate more resources to basic education, specifically ECDs, to improve the quality of education learners have access to, so that a greater number of them are able to complete their matric and have access to higher education institutions. The EFF has made several calls, over the years, for free quality education, but she acknowledged that this could only happen if the country’s economy began growing, she said.

The money to be used for the National Health Insurance (NHI) could instead be used to upgrade and build new clinics for communities.

She wondered how the Department of Home Affairs (DHA)’s planned introduction of the digitisation project would achieve its aims as the department’s officials are already known to provide poor customer services to citizens.

Mr P Swart (DA, Western Cape) was concerned to hear that even after spending large sums of money in the past 3 decades, the majority of citizens still faced serious hardships. Their plight placed additional pressure on the Government of National Unity to work together.

He also expressed concern around the state of SOCs, which have consistently been provided bailouts, and the country’s high debt levels.

Thereafter, he asked the FFC what strategies could be implemented to improve the management and effectiveness of the Department of Police (DoP), given the public’s dissatisfaction with the previous leadership; what innovative ways it had in mind on how the government could better serve citizens; what proposals it had to address the concerns around the viability of the new CSFM, especially considering the declining budget; if it believed that the 2024 Appropriation Bill contained adequate mechanisms to address the challenges raised by the various provinces regarding allocations to ECDs and their performances; and if it could provide an update on the progress of the government's exploration of implementing zero-based budgeting.

Mr J Britz (DA, Eastern Cape) expressed concern regarding the increasing national debt, which has left the country spending more than it earns, and asked: what the country’s debt was; what the repayment per annum on this debt was; and what percentage of the country’s revenue went to servicing debt costs. 

In addition, he asked whether the FFC thought that SOCs, in their current form, were sustainable, and if the entity had developed and recommended a turnaround strategy for them; how sustainable the SRD grant was and if there were any proposed alternatives; for feedback on the discussions around introducing a basic income grant; and what the entity’s proposals on the CSFM were, given the critical role young people will play in shaping the country’s future.

The Chairperson reminded Members that as a constitutional body that makes recommendations to assist Parliament and provincial legislatures, the FFC served as a key strategic stakeholder. Some of the questions asked by the Committee would only be answered during oversight visits over the departments they asked questions about.

Mr Mgozo, in response to the question on how the proposed allocations in the Bill may impact different sectors of the economy and address any potential disparities, felt that the government’s budget allocation to the Department of Trade, Industry and Competition (DTIC), which is responsible for industrialisation, identifying and supporting sectors that are important for economic growth, showed its intentions towards stimulating growth in the country.

Regarding what ways the FFC believed the Committee could collaborate with it to ensure that the Bill reflects the national priorities and addresses key fiscal challenges, he mentioned that the main national priorities have been those that speak to poverty, unemployment and inequality. The government continues to prioritise these three areas due to the impact they have on the general populace. However, due to lower economic growth, unemployment and poverty, to an extent, has increased. Unless the economy grows, there is very little that fiscal policy can do to address the key national priorities.

Adding on, he said the FFC has noted the government's pursuit of fiscal consolidation, which is aimed at stabilising public finances so that more can be done to address the country’s economic challenges.

Concerning what the abbreviation GFECRA stood for and what the terms and conditions of the GFECRA settlement were, he outlined that it stood for Gold and Foreign Exchange Contingency Reserve Account, which is a valuation account that captures gains or losses on foreign exchange holdings arising from exchange rate movements. The account is managed by the South African Reserve Bank (SARB), as it is linked to the country’s exchange rate, but belongs to the NT.

As the funds in the account have increased over the years, due to the depreciation of the Rand, the NT decided to use some of those funds to reduce the country’s debt levels. This decision has pleased investors. While the FFC was pleased with the effects this will have in the short-term, it believed that structural reforms had to be taken by the government to ensure growth in the long term.

On the financial viability of SOCs, he said the FFC proposed that the government establish a holding company that will be responsible for them, as is done in other countries. This company will bring together a team of experts from the different sectors within which the SOCs operate who will assist in developing turnaround strategies for the enterprises.

The FFC further advocated that the holding company run its affairs without depending on the fiscus. Having SOCs fall under such a company would be better than them being run by the DPE, as the company would be run by people who have a vested interest in the success of the enterprises, thus ensuring they generate adequate profits to sustain themselves.

Regarding the country’s current debt levels, he agreed that they had to be resolved. Usually, the FFC expresses debt levels as a percentage of gross domestic product (GDP) in its presentations because expressing them in monetary terms would require converting the debt into Dollars. At present, debt sits at 74.1% of GDP, meaning that for every Rand generated in revenue, 20 goes towards repaying the debt.

Although it acknowledged the high debt-to-GDP ratio, the FCC believed that the economy's trajectory was more important than debt levels. For instance, there are countries with high levels of debt, but due to their economies' trajectory, it is clear how the debt will be paid, whereas in South Africa’s case, this was not clear.

On the introduction of the BIG, he stated that some research has been done to inform the government on the BIG, but it has yet to make a decision on introducing it. Some researchers argue that money allocated to the BIG will not be lost in the economy due to the multiplier effects. On the other hand, a separate study conducted by the FFC found that multiplier effects in the country are currently low, whilst others showed that they are negative, he mentioned.

Ms Peters, in response to the question on how the proposed allocations in the Bill may impact different sectors of the economy and address any potential disparities, said the Bill tries to do much in a constrained resource envelope. It has made allocations to the departments responsible for stimulating growth and development while also trying to maintain social protection programme spending. The FFC has found that sparse allocations were made in all the departments, and it questioned whether the money allocated was going where it was intended.

Regarding the suggestion for more funds to be allocated to basic education, she said the FFC believed that there has to be a strategic re-think of how to fund the education sector as a whole. More emphasis has to be placed on early learning programmes (which at the moment receive under 2% of the basic education budget), building a strong foundation for children to progress all the way to tertiary. The consequence of what the FFC termed upside-down prioritisation is that 82% of learners in grade 4 cannot read for meaning, she argued.

Referring to the question of whether beneficiaries of the Ilima/Letsema Grant were provided market access to sell their agricultural products in large retail stores, she outlined that the FFC did an analysis on agriculture spending, specifically on small farmers, and found that provinces spent on average under 2% of total resources they have at their disposal. The FFC also found that the average spend per beneficiary of the R1 billion-funded Comprehensive Agricultural Support Programme (CASP) is very low and does not help farmers become sustainable.

Access to markets continues to be a challenge, and the FFC recommended that the government consider publicly procuring agricultural produce from smallholder farmers so that they can form part of the supply chain.

Touching on the question related to the functions of the DWS, she explained that some of the functions are exclusive, meaning that they are the domain of one particular department or sphere. In contrast, others are concurrent across different spheres. In the case of the DWS, it has a concurrent function, which usually sees the national department setting legislation, regulations, norms and standards, with the sub-national government responsible for service delivery.

Schedule 4b of the Constitution states that the local government is responsible for stillwater management systems in built up areas, and also for water and sanitation services limited to potable water supply systems and domestic wastewater and sewage disposal systems.

Regarding what strategies could be implemented to improve the management and effectiveness of the DoP, she said the FFC believed that increased allocations should be made to core service delivery programmes that will see more police officer boots on the ground to keep communities safe.

The FFC also stressed the need for the DoP to leverage existing technology to, for instance, electronically record registered cases, and for the department to work in a coordinated fashion with its cluster partners in the Justice, Crime Prevention and Security Cluster.

On the implementation of a BIG, she felt that the government’s current approach to the SRD was unsustainable and placed a significant burden on the fiscus, with an additional R33 billion being made in the 2024 Budget Speech to extend the grant until next year. Whatever does replace it must be fiscally sustainable, she stressed.

The Chairperson asked if Members had follow-up questions.

Mr Britz noted that the SARB predicted a growth rate of 1.2% for this year and 1.6% for the next year, whereas the International Monetary Fund expects 0.9% growth at the end of this year and 1.2% for 2025, based on the possible inflation increase. He asked if the FFC shared the SARB’s prediction, or predicted a lower growth rate.

Ms Siwisa agreed with the FFC’s recommendation for a comprehensive economic growth strategy to overcome obstacles to growth and industrialise the country. However, introducing a BIG instead of creating jobs via industrialisation will ensure that the unemployed remain dependent on the government.

She did not agree with the idea of establishing a state-owned holdings company as she believed it was another way of privatising SOCs. She asked what benefits of forming such a holding company would be. 

Ms S Nxumalo (ANC, Mpumalanga) thought that if more efforts were made to assist small commercial farmers, the high unemployment in the country, particularly among the youth, could reduce. She further highlighted the need to allocate more resources to ECDs to improve educational outcomes.

There was a need for the National Council of Provinces (NCOP) to strengthen its political oversight, she felt, as rural communities have not experienced much of what is said to have been implemented by political authorities.

She noted that not much has been said about the risk of debt to the country’s fiscal position.

Mr Swart proposed that the Committee host an internal workshop to discuss new ideas on how to strengthen its oversight work.

He asked what course of action the government had thought of to ensure that businesses are complying with tax and labour laws, so that more revenue can be generated and the jobs of locals are protected. This was especially important given the high number of illegal businesses operating in the country, which do not employ residents, and contribute to taxes, he said.

The Chairperson reminded Members that they would have an induction on 31 July 2024.

Mr Mgozo, in response to the question on whether the FFC shared the SARB’s prediction, mentioned that the growth projections were done by various institutions. Usually, updates on projections are provided by the SARB after the monetary policy committee meets, and the NT during the presentation of the budget. The FFC did not endorse any of the projections, because it does not currently run its own final models

On the BIG versus the creation of jobs, he stated that it depended on how one looked at it, because in any economy there will be a vulnerable group that has to be protected, so social protection has to be a part of fiscal policy. This, however, did not substitute the creation of jobs – both could be pursued as a means to create social harmony.

Regarding the benefits of the holding company, he said the FFC was awaiting the government's update on how the company will eventually look like. In other countries, the profits accrued by this company are shared with the SOCs.

On what was being done to tackle the high number of illegal businesses operating in the country, he stressed the need to empower the South African Revenue Services (SARS) so that it can conduct investigations into which companies are tax compliant and which ones are not. Tackling the issue will also require a joint effort from the DHA and South African Police Services (SAPS), he added.

The Chairperson mentioned that the Committee raised several concerns on the Bill, such as access to quality drinkable water, education, the student funding model, SRD grant, and health, during its meeting the previous day with the NT. In that meeting, the Committee flagged slow economic growth and poor financial state of SOCs as a significant challenge to the country’s fiscus.

The Committee planned to further consider both the FFC and NT’s inputs to strengthen the quality of its deliberations and recommendations on this Bill.

Thereafter, she asked if there were any announcements.

Mr Lubabalo Nodada (Committee Secretary) said the Committee would be briefed by the Parliamentary Budget Office (PBO) on 23 July, and the following day, conduct public hearings on the Bill.

The Chairperson asked that the secretariat provide the required documents 48 hours before the meeting on 23 July.

The meeting was adjourned.