ATC151103: Report of the Select Committee on Finance on the 2015 Revised Fiscal Framework, dated 03 November 2015

NCOP Finance

Report of the Select Committee on Finance on the 2015 Revised Fiscal Framework, dated 03 November 2015

1.         Introduction

The Minister of Finance tabled the 2015 Medium Term Budget Policy Statement (MTBPS) before Parliament on 21 October 2015 in terms of the Money Bills Act. 

Following engagement with the Minister of Finance on 23 October 2015, the Standing and Select Committees on Finance (otherwise referred to as Committees) received input from the Parliamentary Budget Office (PBO) on 27 October 2015 and held public hearings on 28 October 2015. The following stakeholders made submissions: the Federation of Unions of South Africa (FEDUSA), Ilifa Labantwana, Rural Health Advocacy Project (RHAP), Mr J Rossouw (on behalf of himself and researchers F Joubert and A Breytenbach); Congress of South African Trade Union (COSATU) and the Financial and Fiscal Commission (FFC).

2.         Input from stakeholders

2.1          Parliamentary Budget Office

 

The PBO noted that the National Treasury (NT) aims to reduce the budget deficit over the medium term from 3.3 per cent in 2016/17 to 3 per cent in 2018/19. However, PBO noted that risks to the fiscal outlook pose threats to this fiscal objective; in particular lower growth estimates over the medium term mean government spending would have to decrease or revenue would have to increase, or both a decrease in spending and an increase in revenue to maintain the same deficit as a share of GDP. Although the revenue forecasts have been revised downwards over the medium term, the expenditure ceiling was maintained in line with Budget Review levels and close to what was set out in the 2014 MTBPS. 

 

The PBO noted that South Africa’s revenue collected as a share of GDP is broadly similar to other emerging-market economies, however the poor growth outlook in the medium term affects revenue collection. As revenue is required to fund national priorities such as the National Health Insurance, NT hinted at possible additional revenue raising measures. The Davis Tax Committee (DTC) released papers for comments related to VAT, a Wealth Tax and Mining and extractive sector taxation. Any additional revenue proposals have to be sensitive to the impact on growth.

 

The PBO noted that NT proposed a fiscal guideline – a fiscal rule of thumb- for determining outer year expenditure in the MTEF. The PBO believes while the proposed fiscal guideline has advantages, such as transparency and counter-cyclicality, there are challenges in its effective implementation, especially forecasting a country’s potential growth.

The PBO noted that South Africa’s debt ratios had been improved by a revaluing of the country’s GDP conducted by StatsSA.

The PBO said that an important issue to address is: what is a sustainable level of debt for South Africa, and given this what should the debt target be?

The PBO provided a preliminary analysis of issues that have arisen in relation to higher education funding, in response to concerns raised by Members in the preceding week’s meetings. These concerns relate to three main issues:

• Affordability of university fees;
• Funding, and funding model, of the National Student Financial Aid Scheme (NSFAS); and
• Overall level of funding for the higher education system.

The PBO received a preliminary estimate from the Department of Higher Education and Training (DHET) of R2.6 billion needed for “no fee increases” at universities. The PBO noted that an important consideration in determining the appropriateness of fee increases was higher education inflation. However, addressing the difference in sector inflation is a general policy issue that needs to be considered when determining appropriate expenditure allocations. For example, some have argued that poor South Africans experience higher consumer price inflation (CPI) and therefore social grant values should increase at a faster rate than average CPI. The PBO noted that a study commissioned by Higher Education South Africa has argued that cost increases faced by universities were higher than average consumer price inflation.

The PBO presented Members with information from costings done by DHET of different policy scenarios in relation to NSFAS. These involve either an increase in the means test, or an increase in the NSFAS grant to cover full costs of study, or both. The total effect of such changes would imply a shortfall of R1.6 billion to R22 billion in total over 2016/17 and 2017/18 relative to the current Medium Term Expenditure Framework (MTEF) allocation.

The PBO noted that the DHET cost estimates are based on a number of assumptions and the PBO has not had time to do its own estimates.

Although there seems to be broad agreement that the higher education system is underfunded, the PBO explained that it needed more time to provide a thorough analysis of this issue. The PBO noted that from a planning perspective it is concerning that increases in student numbers have not been matched by increases in financing.

2.2          Federation of Unions of South Africa

FEDUSA supports the spending priorities outlined in the MTBPS over the medium term, particularly those on quality education, skills development, health, social protection, social and economic infrastructure, and the provisions for decent job creation. FEDUSA submitted the following proposals:

·         Government should address the binding constraints to inclusive economic growth through National Economic Development and Labour Council (NEDLAC), Operation Phakisa and other platforms. Deep reforms are necessary to support continued investment in economic infrastructure, particularly, public transport, logistics and energy sectors.

·         The Department of Trade and Industry (DTI) should aid firms to expand their exports through incentives, while the Department of Science and Technology should enhance the programme of government on research, development and innovation.

·         The proposed legislation on State Owned Entities (SOEs) must be fast-tracked Organised labour should be represented on the SOEs boards.

·         Government must table in NEDLAC a paper on the review of business incentive programmes in all economic sectors to support labour intensive and decent job creating outcomes.

·         While FEDUSA supports the countercyclical fiscal policy approach, government should manage the growing public debt more effectively and continue to narrow the budget deficit to 3 per cent over the medium term.

·         Government needs to establish an industrialisation Phakisa to address the complex issues of manufacturing.

·         There is a need to adopt a modern approach to collective bargaining. Realistic and practical wage agreements must be adopted, without having to reduce essential spending on core and critical skills needed for quality public service delivery.

·         National Treasury must implement the retirement reforms proposals in 2016 and increase applicable thresholds to protect the interests of members.

2.3          Ilifa Labantwana

Ilifa Labantwana is run by an NGO as a national programme that aims to secure the public provision of quality Early Child Development (ECD) services, focusing on the poorest 40 per cent of children under the age of six years. The NGO holds that scientific evidence shows that investment in early childhood education – the period from conception to age three – offers higher economic returns compared to an equal investment in education at later stages in life.  

Ilifa Labantwana pointed to the DPME 2013 ECD diagnostic study which found several inadequacies in the national ECD system, including that it is founded on a limited view of ECD as the provision of early learning centres through ECD centres; it excludes the majority of children in the poorest communities; does not provide essential services to the youngest children (when the first 1000 days are the most important); and does not provide parenting support and home and community-based early learning and care services for the youngest children. Ilifa Labantwana stressed the need to support non-centre-based care and home-based programmes.

The NGO welcomes the MTBPS’s prioritisation and allocation of additional resources towards strengthening Grade R.

However, Ilifa Labantwana is concerned that the MTBPS is too limited in its focus and allocation of ECD resources to ensure a meaningful realisation of ECD priorities as set out in the “Integrated Programme of Action for Early Childhood Development” and the draft “ECD National Policy”.  The MTEF provides for targets that are limited to increasing the number of children receiving the subsidy by 127 000 and possibly making funding available for “minor facility upgrades to about 4 000 ECD sites” and that there is no mention of increasing the sum of the subsidy; and increasing the budget allocations to ensure the development and delivery of ECD services for children with disabilities.

 

The NGO believes that there must be a shift in the MTEF in how ECD funding priorities and budget allocations are framed to ensure that the new policies are implemented effectively and “lay the foundations for achieving the NDP from the bottom up”.

2.4          Congress of South Africa Trade Unions  

COSATU welcomes certain aspects of the MTBPS but is of the view that National Treasury should abandon its “discredited conservative fiscal and monetary approach”. Amongst other things, COSATU welcomes an increase in social grant recipients from 16.7 million to 18.1 million by 2018 and plans to build substance abuse centres.

COSATU is concerned about overcrowding, crime and corruption in the Department of Justice and Correctional services;  affordable, safe, reliable and accessible public transport; insufficient funds allocated to support emerging farmers and rural development,  underspending of R400 million in housing grants and R700 million in water infrastructure; and  a decrease in tourist levels in the recent quarter.

The following proposals were submitted:

·         Government should not increase VAT but consider increasing company taxes, introduce a tax on luxury goods and a wealth tax on millionaires and implement the carbon tax.

·         NT should not decrease the size of the public service but rather focus on wiping out ghost employees (36 000 uncovered in the North West Province) and eradicating the wage gap within the public service.

·         Government must stop bailing out Swaziland through the Southern African Customs Union (SACU) payments.

·         The sale of the assets or engagements in any attempts at privatisation or the stripping of state owned assets should be avoided. Instead, managerial incompetence, corruption, outsourcing, insufficient state funding, the wage gap, and labour broking in SOEs need to stop.

·         The provincial surpluses of R6 billion while millions of South Africans are hungry and unemployed, are not acceptable. Government must provide the necessary capacity to ensure that departments’ budgets are correctly aligned and spent.

·         There is a need to improve education outcomes by addressing management problems in the Department of Basic Education.

·         Departments and municipalities should refrain from abusing the Expanded Public Works Programmes or Community Works Programmes as a form of cheap labour and replacement of permanent for temporary jobs.

2.5          Rural Health Advocacy Project (RHAP)

The RHAP is an NGO working on health care financing and rural health. Its concerns include equity, efficiency and effectiveness of expenditure in rural health care contexts.

RHAP is concerned about staffing moratoria implemented at the provincial level; budgetary pressures which have emerged; and a number of growing accruals.  It cautioned that keeping health sector employment down would potentially diminish capacity to deliver services and may lead to staff leaving the public service.

RHAP recommended that:

·         The National Department of Health in collaboration with National Treasury should provide guidance through policy on how provinces should protect critical posts.

·         NT should play a role in ensuring that District Health Managers develop costed recruitment plans and provide guidance on how the financial aspects should be addressed.

·         Decision-making on cost saving and cost-cutting must be made at the district level by allowing districts to decide based on Promotion of Administrative Justice Act (PAJA) principles of rationality, proportionality and the constitutional right to health.

·         Corruption and unauthorized expenditures should be performance managed.  

·         The public sector wage bill needs to be reviewed without placing a blanket moratorium on health personnel.

·         Government needs to guide treasuries on how to exercise their discretion in protecting health rights in cases where Treasury directly intervenes in health administration.

2.6          Financial and Fiscal Commission (FFC)

The FFC’s medium term growth forecasts are in line with the 2015 MTBPS projections. The Commission identified severe pressure faced by the mining industry and infrastructure bottlenecks as the main internal dynamics impacting on South Africa’s growth prospects.

The Commission is of the view that SA should continue to focus on its strategy of reigniting growth, i.e. improving education outcomes, increasing skills bases, maintaining strong growth on social safety net spending, and increasing productivity of public infrastructure. Its main concern is reduced national efforts to facilitate economic growth through infrastructure led growth.

The FFC re-emphasised the need to resolve electricity supply constraints; implement more coordinated policies to enhance Small Micro and Medium Enterprises (SMMEs); address the skills mismatch within the labour market; and enhance the efficiency of infrastructure spend across the three spheres of government.

The FFC noted an upward revision in net debt to GDP ratio from 43.7 per cent in the 2015 Budget Review to 45.7 per cent in the 2015 MTBPS. A progressive decline in the primary balance suggests that government is sticking to its plans to reduce its debt costs and overall budget deficit.

According to the FFC, the risks to the fiscal outlook include further deterioration in economic growth, very limited room to respond to unexpected spending pressure or revenue underperformance, and the weak financial positions of several major public entities. To manage these risks, government must alleviate short-term electricity constraints, implement reforms to public sector remuneration framework and work with SOEs to implement realistic turnaround plans. The areas of risk to the fiscal framework include the wage bill challenge, the current economic outlook, labour dynamics and recent higher education and training developments.

The Commission submitted short term and long term options regarding the recent higher education and training challenges as follows:

·         Short term considerations, zero per cent fee increase in 2016: challenge in finding R2.5 to R4 billion shortfall: Universities can reduce their expenditure and likely compromise the quality of education. Alternatively, the state can intervene and provide funding through reprioritization within the DHET and later across government. Government can utilize unallocated contingency reserves (R2.5 billion set aside for 2016/17 and increase risk of natural or other disasters) or continue with the sale of state assets, an approach used to fund the R23 billion equity injection to Eskom.

·         Long term considerations, provision of free education at tertiary institutions: This policy requires a significant amount of additional funding. Available options include significantly reprioritizing state funding; implementation of plans to sell non-strategic assets; increasing the tax burden; and borrowing. The FFC supports the task team set up to review the funding model underpinning the existing high university fees. It proposes that the broader system within which the universities operate be considered and advises that students should be differentiated in terms of need and that there should be clarity about what is meant by free education at tertiary level, to ensure that the funding is sustainable.

2.7          Professor Jannie Rossouw

Professor J Rossouw focused on South Africa’s “fiscal cliff”. Professor Rossouw believes that social spending is not sustainable and suggested that acceptance of the 2014 MTBPS proposal to increase the qualifying age for child support grant to 21 and old age pensions for all people over 60 would place an additional burden of R31 billion on the fiscus.

Professor Rossouw believes that civil service remuneration as a percentage of GDP is high at 12 per cent. If government continues “business as usual”, SA will reach a fiscal cliff by 2032. Alternatively, if government does not extend social grants, not increase taxes and manage civil service remuneration, then SA can reach a fiscal plateau.

His proposals include: remuneration increases should be affordable; social grants should not be extended; increase personal income tax above R1 million per annum (extra R6.82 billion) as opposed to wealth taxes; and that there should be a review of SACU payments, particularly to Swaziland. This would add an additional R45 billion to the fiscus. Professor Rossouw believes that government officials and politicians should only use vehicles manufactured in South Africa to stimulate demand.

3.         Committees’ observations and deliberations

The Committees deliberated as follows:

3.1        Despite the economic growth and revenue raising challenges, the revised Fiscal Framework must seek to bring about greater equity and address the challenges of unemployment, poverty and inequality.  

3.2      The Committees acknowledge the difficult economic conditions in which the MTBPS is tabled and believe that it is a reasonable attempt to balance the need to manage expenditure and ensure resources to advance the developmental goals of the country.

3.3        However, the Committees are concerned about the downward revision of economic growth and revenue forecasts and the impact this will have in the long term on the need to reduce inequalities, poverty and unemployment. While recognising that government programmes as a whole are directed towards economic growth, the Committees believe that the MTBPS does not focus enough on how economic growth is to be stimulated over the MTEF period.

3.4        The Committees support the students demand for no fee increases during 2016. The Committees also believe that there should be free tertiary education for those in need, and government, through engagement with the key stakeholders, needs to explore the possibilities of this. This should include defining who qualifies as needy.

3.5        The Committees believe that tertiary education should be more directed to producing the skills the economy needs, partly to ensure that graduates are more likely to be employed and contribute to the country’s developmental goals.                        

3.6   The Committees note the expanding public sector wage bill and believe that a performance management and development system in the public sector is long overdue. The Committees believe that any public sector salary increases need to be linked to improvements in the productivity of public sector workers and advancing the broader developmental goals of the country.

3.7        The Committees note with concern the decline in revenues during the MTEF period.

3.8        The Committees notes with concern the decline in the contingency reserve.

3.9        The Committees note with concern the fiscal risks posed by South African Airways.

3.10 The Committees note with concern the high rate of debt to GDP ratio and the increasing debt service costs and believes that this should be managed in ways that does not undermine the country’s developmental goals.  

3.11      The Committees note that it has been discovered that there are about 36 000 “ghost workers” in the North West Province and believes that other provinces and national government departments need to do more to identify and stamp out any “ghost workers”.

3.12      The Committees note the severity of drought in some parts of the country, its impact on the economy, and particularly on food security, food prices and possible job losses. The Committees welcome the efforts being made to assist in this regard by the Department of Agriculture, Forestry and Fisheries, the Department of Cooperative Governance and Traditional Affairs, and the Department of Water and Sanitation. The Committees believe that government has to, within its constraints, do more to assist.

3.13      The Committees note with concern that in the past financial year, the provinces could not spent about R6 billion and that this has probably compromised service delivery.

4.         Committees’ recommendations

4.1          The Committees recommend that NT considers the submissions made by stakeholders referred to in section 3 above and provide a response to them when it comes before the Committees to present the 2016/17 budget next year.

4.2        The Committees recommend that in future the MTBPS should set out in more concrete detail proposals on stimulating economic growth. 

4.3        The Standing and Select Committees on Finance have to work closely with the Standing and Select Committees on Appropriations in addressing issues on the financing of tertiary education. From parliament’s side, it will be the Appropriations Committees that will have to address many of the key issues. Overall, there are two key aspects: the “no-fee increases” for 2016 and the funding of tertiary free education for the needy. While recognising the complexities, the Finance Committees recommend that the Presidential Task Team dealing with the funding for “no-fee increases” finalises its work as soon as possible. Universities should, within their means, contribute to this funding as far as possible, but government will have to find the remainder of the funds from within the national fiscus.  The Appropriations Committees will, after engaging with the Higher Education and Training Portfolio and Select Committees, have the primary say from parliament’s side on this, but for now the Finance Committees suggest that government looks into the possibility of the budget of DHET being reprioritised to find some of the funding for “no-fee increases”. Consideration needs to also be given to allocating unused funds from the National Skills Fund and the SETAS, while ensuring that skills training needs are not unduly undermined.  The Finance Committees recommend that government, through engagement with all the relevant stakeholders, consider providing free tertiary education to the needy reasonably soon. The Committees recommend that the MTEF should reflect progress in this regard. The Finance Committees need to work with the Appropriations Committees to mandate the PBO to begin work on developing parliament’s position on this as soon as the Appropriations Committees have processed their work on the current MTBPS. The government needs to ensure that it is far more effective in getting NSFAS loans repaid by beneficiaries who can afford to pay back and must deal with inefficiencies in its loan repayment system. 

4.4        The Committees recommend that NT, within the norms and protocols of interdepartmental exchanges, engages with DHET and the Department of Planning, Monitoring and Evaluation on the need for universities to produce graduates who are more likely to be employed and meet the developmental needs of the country. Provincial government departments need to visit high schools to encourage learners to consider studying in areas of needed skills, such a civil engineering, financial management, boiler makers, and fitters and turners. A report on this needs to be provided to the NCOP Select Committee on Finance by October 2016.

4.5        The Committees require NT to brief them in the first quarter of 2016 on:

• The “fiscal rule of thumb” guideline that links the expenditure ceiling to long-term economic growth projections over the MTEF period, bearing in mind the reservations raised by the PBO in section 2.1 of the report above and other implementation challenges.
• Improvements on the capital project appraisals model.

4.6    The Committees recommend that NT provides a comprehensive report in writing on progress on its cost-containment goals within 21 days of the adoption of this report by parliament.

4.7    NT needs to engage more effectively with DAFF, COGTA, Department of Water and Sanitation and the Department of Rural Development and Land Reform to see what more can be done about the drought affecting key parts of the country.

4.8        The Committees broadly support the positions of Ilifa Labantwana set out in section 2.3 above and recommends that NT engage with them and the Department of Social Development and seeks within budgetary and other constraints to progressively address their concerns. The Committees would like NT to report back to them on this when the 2016/17 national budget is brought to the Committees for consideration  

4.9        The Committees support some of the key concerns raised by RHAP in section 2.5 above and recommend that NT meet with them and the National Department of Health and report back to the Committees when the 2016/17 national budget is brought to the Committees for consideration.                         

4.10      While recognising the complexities, the Committees recommends that NT should seek to ensure that SAA is financially viable reasonably soon.        

4.11      The NT should work with the Provincial Treasuries to finalise the personnel headcount projects in the provincial departments and report to the Finance Committees.

4.12      The NT should work with the national and provincial departments to determine the causes of underspending, and contribute more to ensure more efficient and effective spending, and the tabling of more credible budgets aligned to key government priorities. The NT needs to monitor the fiscal performance of provincial treasuries more effectively as there are cases of accruals of over R1 billion, while cash in the bank is minimal.

4.13      In the 2015 fiscal framework report, the Committees recommended that the NT considers reviewing the revenue sharing formula with regards to Southern African Customs Union (SACU). The Committees request an update from NT in this regard;

4.14      The Committees recommend that the Stakeholder Management Bill designed to more clearly define the stakeholders role in State Owned Companies be introduced as soon as possible.       

 

Report to be considered