ATC200707: Report of the Select Committee on Finance on the 2020 Special adjustments Budget Revised Fiscal Framework, Dated 07 July 2020
REPORT OF THE SELECT COMMITTEE ON FINANCE ON THE 2020 SPECIALADJUSTMENTS BUDGET REVISED FISCAL FRAMEWORK, DATED 07 JULY 2020
The Minister of Finance, (Minister) Mr Tito Mboweni tabled the 2020special adjustmentsbudget before Parliament on 24 June 2020. Section 30 of the Public Finance Management Act, Act No.1 of 1999 (PFMA), read together with Section 12(1) of the Money Bills Amendment Procedure and Related Matters Act, Act No.9 of 2009 (Money Bills Act) empowers the Minister of Finance to table an adjustments budget when necessary. The Coronavirus Disease 2019 (COVID-19) pandemic and the economic downturn has made it necessary for the Minister to table such a specialadjustmentsbudget now and the annual adjustments budget will be tabled as usual in October 2020, together with the Medium Term Budget Policy Statement (MTBPS).
Sections 12 (3), 12 (5) and 12 (7) of the Money Bills Act, requires that the Minister must table a revised fiscal framework with the national adjustments budget if there are changes to the fiscal framework and that if the Minister has tabled a revised fiscal framework, it must be referred to a joint sitting of the Committees on Finance for consideration and report.
In processing the revised fiscal framework, the Minister of Finance together with the Director-General (DG), Mr Dondo Mogajane and Senior officials from the National Treasury (NT) briefed the Committees on Finance on 25 June 2020. The Committees received a post budget briefing from the Parliamentary Budget Office (PBO) and the Financial and Fiscal Commission (FFC) on 30 June 2020, in line with their statutory mandates.
The Committees on Finance held public hearings on 01July 2020 and received a total of 16 submissionsfrom the Congress of South African Trade Unions (COSATU), the C19 People’s Coalition (C19), Paul Hoffman of the Institute for Accountability in Southern Africa, the Organisation Undoing Tax Abuse (OUTA), the Budget Justice Coalition (BJC), Fiscal Cliff Study Group (FCSG), the Economist Initiative,the South African Institute of Chartered Accountants (SAICA) and Mr Peter Meakin.
The following organisations made written submissions but did not make oral submissions: the Children’s Institute, Prof Geoff Everingham of the University of Cape Town (UCT), the Civil Society, Mr Aboobakar Mahomed Kharvaand Mr Moses Moadira. The NTresponded to the inputs and submissions 03 July 2020.
2.Overview by the Minister of Finance and the National Treasury Director General
In his remarks, the Minister mentionedthat the global economy is growing at a slower rate but it is expected to have a V-shaped recovery depending on the support of countries, individually and collectively, the continental and domestic economy is expected to follow a similar trend as the global economy and that the South African economy is expected to contract by 7.2 %in 2020. The Minister indicated that, while the South African economy was already in a technical recession before the pandemic, the COVID-19 outbreak and the lockdown that followed, deepened this level of contraction. This led to reduced revenue collection (a shortfall of R300 billion this year) and has constrained our ability to spend.
The Minister believes that there is a need to keep revising the economy while the COVID-19 pandemic is being addressed. He cautioned that, “as we do this, we are in a terrible debt situation, we are facing a situation where current borrowing activities might make it difficult for the private sector to access capital for investment, the crowding out effect”. This, he said, made it necessary for NT to approach the International Financial Institutions (IFIs)such as the International Monetary Fund (IMF), the World Bank, the New Development Bank (NDB) and the African Development Bank (ADB) for funding.The Minister emphasised that the negotiations at these institutions are difficult.
The Minister highlighted that the expected consolidated budget deficit, which includeactivities such as social insurance, will be 15.7 %of Gross Domestic Product (GDP) while the budget deficit will average around 14.6%of GDP. The “herculean” task for the Minister was to put measures in place to grow the economy and close the “the hippopotamus mouth” opening to avoid sovereign debt crisis.
The Minister further emphasised that the special adjustments budgetis not a February National Budget. It is meant for special adjustments and key issues that necessitated it are the COVID-19 pandemic and the economic downturn prior to that. The Minister explained the rationale for funding mechanisms of the special adjustments budget. The Minister said that the NT first considered the domestic and global borrowing avenues such as the Treasury Bills and Bonds and then considered the IFIs. In this instance, the Minister approached the IMF for COVID-19 crisis funds, acknowledging that historically, the IMF has been a problematic institution in that the conditions of loans provided in the 1970s were not favourable.
The DG of the NT, Mr Dondo Mogajane and his Senior Management team outlined the key issues reflected in the specialadjustments budget. These include expected GDP contraction in 2020 due to lower economic activity resulting from COVID-19 pandemic, an indication that government’s fiscal policy stance is mildly expansionary and that the fiscus is unprepared for another shock.The DG highlighted that debt now accounts for 21 %of total government revenue, with the debt service level crowding out other government expenditure, that debt to GDP ratio is expected to stabilise in 2023/24, that tax revenues are weaker following weaker Value Added Tax (VAT) and individual taxes, with a projected revenue shortfall of R304.1 billion. Emphasis was made about the debt outlook scenarios and that the gross borrowing requirement which is now expected to reach R776.9 billion in 2020, up from R344.2 billion since February 2020.
The NTexpects that in 2020, the financial situation of State Owned Enterprises (SOEs), will worsen further, putting pressure on the fiscus. Apart from the structural financial challenges, the situation at SOEs was worsened by COVID-19 pandemic, the NT said. The current budget includes R3 billion initial bailout for the Land Bank and its sustainability may require further support.
The DG of the NTassured the Committees that borrowing from the IMF will not compromise the country’s sovereignty as there are no structural conditions attached to the loans. He indicated that amongst other things, the IMF need a Memorandum of Understanding (MoU) between the NTand the South African Reserve Bank (SARB) on matters such as the promissory notes as the money will flow through the SARB. Other things required by the IMF include debt stabilisation by 2023/24 and implementation of commitments already made by the government, the DG said.
With regards to the structural reforms and economic reforms, the DG indicated that NTis working with the economic cluster and further details on reforms will be providedduring the 2020 MTBPS tabling. NTis optimistic that the “active scenario” which, amongst other things, seeks to stabilise debt by 2023/24, can be achievedif implementation of reforms starts immediately. On this matter, the Minister of Finance emphasised that while government provides policy framework, successful implementation of structural reforms requires action and support by all stakeholders including the SOEs, the private sector, the trade unions and all other economic agents, as this in not only the NT’s responsibility.
On fiscal buffers, or lack thereof, the NTindicated that the gap between revenue and expenditure, termed “Hippopotamus mouth” by the Minister, started to take hold from 2009, after the global financial crisis and it became a structural gap. NT said that this gap was caused by (1) unaffordable wage bill, (2) financial crisis of the SOEs, which government bailed out through state guarantees, (3) failure to restore economic growth to pre- global financial crisis period and(4) spending predicated on an economic growth rate that never materialised. NTproposed that three things need to be done in order to stabilise debt by 2020/23are (1) close the structural gap by reducing spending and living within our means, (2) improve tax revenue collection and (3) implement the necessary reforms to grow the economy.
3.Overview of the Special Adjustments Budget: 2020 Revised Fiscal Framework
3.1.Economic overview and outlook
The SA economy is now expected to contract by 7.2 %in 2020 compared to GDP growth of 0.9%projected in the February 2020 budget (a downward revision of 6.3 percentage points), primarily due to restrictions on economic activity to contain the spread of the virus, credit rating downgrades and the effects of weak investor confidence. both the global and the domestic economic environment has deteriorated significantly since the 2020 February budget. Prior to the COVID-19 pandemic, South Africa was already in a technical recession.Economicactivitywas negatively affected by long term structural challenges and the impacts of COVID-19 restrictions, globally and domestically. The 2020 GDP growth forecast assumes low business confidence, low investment, lower employment creation, constrained household consumption and lower demand.
Table 1 below shows the current GDP growth estimates and the NT’s forecasts over the medium term. The South African economy is expected to emerge from this recession in 2021, growing at a rate of 2.1 %. NThas indicated that the economic outlook is highly uncertain and that the outlook may deteriorate further if the global economy continues to weaken, economic activity is curtailed again to protect public health and if government fails to attract sufficient international capital to finance the current account deficit.Inflation expectations appear to be well anchored over the medium term, remaining within the set target range of 3-6 %.
Food, clothing and footwear, housing and utilities, public transport, communication and education items saw a higher price inflation for essential items during the COVID-19 pandemic.
With respect to employment, 38 000 jobs were lost in Quarter one of 2020, with the addition of 306 000 entrants in the same quarter unable to find jobs in the labour market. The total estimated unemployment increased by 344 000.
Table 1: Macroeconomic projections
Source: National Treasury, Reserve Bank and Statistics SA
3.2.Revised Fiscal Framework
Table 2 below shows an expected decline in themain budget revenue from R1 398.0 trillion projected in the 2020 February National Budget to R1099.2 trillion now, a decline of about R300 billion.NTattributed this decline to the impact of a halt in economic activity as a result of the COVID-19 lockdown, also taking into consideration that the fiscal position was already unsustainable. NTexpects revenue to recover to pre-COVID-19 level in 2022/23.
Main budget expenditure as a percentage of GDP increases from 32.5 %to 37.2 %in 2020 (R43.2 billion) reflecting support provided to SOEs in the February 2020 budget, COVID-19 spending and higher debt service costs.
Table 2: Revised 2020fiscal framework and active scenario medium term estimates
Source: National Treasury
The main budget deficit is projected to increase from 6.8 %of GDP (R368 billion) to 14.6 %of GDP (R709.7 billion) in 2020, an increase of R341.7 billion. This is due to expected revenue shortfalls, lower GDP and higher spending to support the pandemic. Gross borrowing requirement for 2020, which takes into account the maturing loans, amounts to a total R776.9 billion. NT cautioned that “if this trend is not reversed, South Africa is likely to face a sovereign debt crisis”.
Gross national debt is now expected to reach 81.8 %as a percentage of GDP (almost R4 trillion), compared to 65.6 %(R3 526 trillion) projected in the 2020 February budget, an increase of R412 billion. NT expects debt to stabilise at 86 %of GDP in 2022/23, at which point debt would be approaching R5 trillion. Debt service costs will increase from R229.3 billion projected in the 2020 February Budget to R236.4 billion, now.
According to the NT, stabilisation of debt to GDP ratio and reduction of the budget deficit will require large spending reductions (fiscal consolidation) and moderate tax increases, economic measures to boost long term growth and reforms to SOEs to reduce their reliance on public funds.
4.Submissions from the stakeholders on the Special Adjustments Budget
4.1.Parliamentary Budget Office
The PBO submitted that government should not be cutting expenditure in the near future in order to address lower economic growth and revenue. It said it instead should be stimulating the economy to grow to offset the losses associated with COVID-19 pandemic and increase economic activity. It added that expenditure should be targeted to help the poorest households and Small Micro and Medium Enterprises (SMMEs) while drawing in bigger businesses to build the recovery.
The PBO submitted that government has to develop additional measures and institutions to ensure that resources are used productively, efficiently and corruption-free. It said that new and increased taxes have to be considered, including wealth, income and capital gains taxes.
The PBO said that a principle should be implemented that rentier incomes based on ownership, market power, licenses and mineral rights (and less on real sector production and productive services) should be taxed more. It said that illicit capital flight, tax evasion, avoidance and slippages, including taxing the revenue of e-commerce, that contribute to base erosion and profit shifting must be tackled with more urgency and increased domestic regulation.
It said that the entire balance-sheet of government should be considered for resourcing the response during this crisis, including the Unemployment Insurance Fund (UIF) surplus and the Private Investment Corporation (PIC) funds, payment holidays to the Government Employee Pension Fund (GEPF) that would release billions to finance government. It added that new borrowing will be required and domestic currency debt should be prioritised because of exchange rate uncertainty. It said that borrowing from the SARB should be considered including reallocating much of the unutilized R200billion loan guarantees towards government’s health and economic responses.
The (continued) centrality of fiscal consolidation in the midst of a pandemic was inappropriate and undesirable, the PBO said. It said that the NT’s design of the response to the COVID-19 crisis ensured that the basic contours of a fiscal consolidation budget remained intact. In other words, the NT designed the new COVID19 package to have a very limited impact on the budget. It argued that NT chose to ignore available government resources in its response. It emphasised that government should use its entire balance sheet to bail out the economy, which includes almost R2 trillion in PIC and UIF surplus. It said that the National Revenue Fund’s cash balance means that the government could finance itself without borrowing on bond markets for about eight months.
The PBO said that government borrowing for spending and investment does not ‘crowd out’ private investment but it can ‘crowd in’ private investment. It argued that domestic savings are not a constraint on investment and government fiscal policy, clarifying that savings are the outcome of investment and not a constraint on investment. It added that savings are the result of income that grows when increased aggregate demand leads to more economic activity, investment and employment. It maintained that the borrowing of government is spent into the economy and increases aggregate demand that crowds in other investments.
The PBO argued that South Africa needs automatic fiscal stabilisers, not large fiscal buffers. It said that implementing fiscal consolidation at this time of crises was inappropriate. It said that South Africa should be considering the development of fiscal resilience by more rapidly investing in automatic stabilisers which include a government funded national health insurance, wider and deeper welfare nets, including unemployment insurance and pensions. It said that these automatic stabilisers provide households with money when economic conditions decline. They are more likely to spend that money during the downturn, which provides much needed economic activity.
Lastly, the PBO decried government’s economic approach to fiscal policy as outdated. It said that South Africa’s fiscal policy was based on an outdated and incorrect macroeconomics perspective. This view, the PBO said, was that government should not use fiscal policy to stimulate the economy and that it should run surpluses; government borrowing crowds out private investment and; government spending cannot improve the economy or reduce unemployment in the medium to long term. It argued that this view was based on the unrealistic assumption that the economy rests at full employment equilibrium and was now no longer held by most mainstream economists who today support the use of expansionary fiscal policy in downturns.
4.2.Financial and Fiscal Commission
The FFCmade a submission to the Committee on the responsiveness of the special adjustments budget to the risks, in terms of Section 214 (2) of the Constitution, which requires that Parliamentary Committees should consider any recommendations of the FFC made during the deliberations on Money Bills. The submission is also made in terms of the FFC Act (1997) as amended, which requires that the FFC should respond to any requests for recommendations by any organ of state on any financial and/or fiscal matter(s) relevant to its mandate.
The FFCis of the view that fiscal and monetary policy support provided must be commensurate with the magnitude of the projected economic contraction.The Commission noted that only R95 billion earmarked for business support, job creation and protection could be considered a fiscal stimulus and is not adequate given the scale of projected job losses, estimated in excess of a million. The FFC believes that the stimulus package should not be delayed considering the damage caused by Covid-19 pandemic and thatunprecedented fiscal and monetary policy interventions will be required to boost the South Africa economy, just to its pre- COVID-19 growth trajectory.
The FFC noted from empirical evidence that public expenditure is a crucial fiscal policy instrument to influence the economic growth and that the causal relationship runs from economic growth to government expenditure. Therefore, from a policy perspective government needs to focus on creating a conducive environment for growth particularly targeting growth enhancing sectors.
The Commission believes that government needs to reconsider the sequencing of phases for managing the pandemic. Meaning that support for investment and employment must be underpinned by economic reforms to achieve effective targeting of interventions.The package of reforms must incorporate suitable public sector reforms such as expenditure reforms, given the conundrum of stagnant revenue, expenditure pressures and foreseeable low growth trajectory.
The FFC recommends that governmentshould reconsider the fiscal consolidation stance on condition that the spending increase is directed at social relief in the short run and growth inducing activities in the long run. Also, the relaxation of the fiscal consolidation must be accompanied by robust reforms focusing on the following: fighting corruption and improving governance; reducing high levels of concentration in the economy; improving land reform and agriculture for food security; reducing the cost of broadband and assignment of high-demand spectrum; and other costs of doing business; strengthening capacity of state and reviewing of “means tests” of beneficiaries of government across the board.
Economic growth stimulation must be at the centre of debt reduction strategy since inadequate revenue is the largest driver of the burgeoning deficit, it said. The Commission therefore recommends that tax policy should prioritise fiscal support to ensure that the economy survives the pandemic because under the current circumstances increasing tax revenues is not a feasible policy option.
The Commission is of the view that intentions by government to stabilise debt are imperative and will be seriously challenged by tax revenue shortfalls, additional expenditure and economic underperformance. In the absence of near term economic recovery,the Commission said that government will need to embark on drastic expenditure reforms in order to stabilise the debt and enhance growth. It saw a need for delicate balance in expenditure reduction and meeting basic needs.
Noting that tax revenue underperformance is expected to be R304.1 billion lower than the 2020 February Budget estimate, the Commission recommends that for 2020/21, the tax policy should prioritise fiscal support to ensure that the economy survives the pandemic because under the current circumstances increasing tax revenues is not a feasible policy option.
The Commission notes the announcement about Zero Based Budgeting but has concerns over its effectiveness in changing the budget structure (data, time and resource intensive); and intense focus on annual major spending areas.
The FFC is in agreement with government stance on reprioritisation but has concerns with the repeat reprioritisation of the budgets and the likely impact on the economy and service delivery.It believes that there is an urgent need to assess the impact of repeat budget reprioritisation on the budget structure and delivery of basic services and that macro-reorganisation of government is needed.
Lastly, FFC recommended that all spheres of government must table plans for revenue enhancement and expenditure management guided by the NT. In addition to that, Parliament should receive reports on how provinces have carried out budget reprioritisation reform plans, with timelines, for each phase of managing South Africa out of the pandemic including measurements for success.SOEs reform plans are equally necessary, as posing stranglehold on the fiscus. The Commission is concerned about lack of information of SOEs restructuring and its consequences to the economy.
4.3.Fiscal Cliff Study Group
FCSG is of the view that the fiscal cliff, which is the point where civil service remuneration, social assistance payments and debt-service costs absorb all government revenue, has been reached as the sum of the three expenditure items will amount to more than 100 % of tax revenue. According to FCSG, civil service remuneration is a significant driver of the fiscal cliff.
FCSG is also of the view that South Africa has not had austerity budgetsfor the past ten fiscal years, which means that no reserve capacity has been created. In this regard, FCSG welcomed the Zero Based Budgeting approach and deems it necessary.
FCSG noted that a once-off social grant payment increase of R41 billion was introduced. Although it regards it as necessary, they are of the view that these measures are not sustainable over the longer term.
FCSG is sceptical about the medium term growth forecasts as they are based on a strong “V-shaped” recovery. FCSG consider these forecasts to be over-optimistic.
FCSG noted that there is a need to protect institutions that still function well but cautions against assisting non-essential and failing SOEs. FCSG also advised that the remuneration of executives at SOEs, as was proposed in the 2020 February 2020, should be limited. FCSG urged Committee Members to take note of the Minister’s warning in relation to a looming “sovereign debt crisis”.
4.4.South African Institute of Chartered Accountants
SAICA commended the Minister of Finance on responding to the COVID-19 pandemic by providing large-scale economic relief measures, particularly those measures that were targeted at supporting the most vulnerable South Africans. It also welcomed the proposed use of Zero Based Budgeting as the guiding principle for the Medium Term Economic Framework (MTEF) and the phasing out of programmes that have a minimal impact on economic performance or service delivery. SAICA notes that if Government does not have the required skills pool to carry out Zero Based Budgeting annually, it may lead to unfavourable outcomes, such as, even more incoherent policy and a lack of co-operation over the long term.
Whilst SAICA supports the idea of improving tax revenue collection mainly through better or stricter enforcement measures, it, however, cautioned against the South African Revenue Service (SARS) implementing measures that will further add to the administrative burden of tax compliant businesses. Furthermore, SAICA welcomed Cabinet’s decision to adopt an active-scenario approach to stabilise debt and grow the economy.
SAICA’s main concern is that NT projections of revenue and GDP growth are overly optimistic. Given that government expenditure is based on estimated GDP and tax revenues, inaccurate revenue forecasts or over-estimating GDP and tax revenue could result in overspending by government resulting in more debt and interest costs.
SAICA submitted that the budget does not seem to cater for SOE bailouts and guarantees; water and sewage infrastructure that is imploding, unsustainable government wages; the underfunding of the GEPF given that the government was (before COVID-19) already underfunding the required contributions by 2.9% in 2018. Additional contributions could exceed the proposed tax increases over the next four years. In this regard, SAICA requested that NT clarifies how the above are catered for in the budget.
SAICA recommended that the Zero Based Budgeting approach should be implemented immediately but NT should explain how it will implement this considering the low skills, weak management and low accountability at departments and municipalities. For the longer term, SAICA suggested that New Zealand’s Fiscal Management Approach should be taken into consideration. In addition to this, it urged NT to review thoroughly the data that underpins its tax revenue estimates and GDP ratios because inaccurate estimates can have an unintended knock-on effects on budgeted expenditure levels in each year. Furthermore, SAICA submitted that the acceleration and expansion of structural reforms to support economic growth are urgent and need to be introduced as soon as possible with clear and detailed action plans. They recommended that all expenditure should be aligned to a proper economic plan (not merely a “wish list” of ideals) with full accountability by political leadership and employees, which includes the introduction of individual performance management and reward systems.
Economists Initiative noted the R145 billion targeted at COVID-19-related expenditure (R106 billion is funded through the suspension of baseline allocations and reprioritisations and the balance of R36 billion is a net increase to non-interest spending in the current year), but contended that the special adjustments budget failed to give effect to the R500 billion rescue package that was announced by the President on the 21st April 2020.
Economists Initiative further noted the proposed spending reductions amounting to R230 billion over the next two years. Their concern, however, is that these reductions are occurring at a time when the country needs a targeted injection of resources to mitigate the damage caused to households, workers and businesses by the COVID-19 pandemic and because this comes on top of previously announced cuts in the 2019 MTBPS and the 2020 adjustments budget. Another concern, is that, these reductions are occurring in key areas such as education; transport; Gender Based Violence (GBV); human settlements; agriculture, land reform and rural development; and the energy sector. Economists Initiative submitted that this current approach leaves the government unable to ensure service delivery and advance the socio-economic rights guaranteed in the Constitution – it undermines government’s ability to support households, workers and businesses during the crisis.
Economists Initiative argued that, in the current crisis, the budget should be guided by the need to support the public health response and keep businesses afloat, workers employed and incomes in the pockets of the poorest. In this regard, alternative approaches to those taken by the Minister may need to be considered. According to the Economists Initiative, these alternative approaches would include significant increased expenditure in the areas identified within the rescue package and could be financed through some combination of solidarity taxation, increased borrowing, mobilising domestic quasi-public funds and SARB action.
Economists Initiative called on the Committee Members to the reject the special adjustments budget.
4.6.Organisation Undoing Tax Abuse
OUTA said that the massive contraction in the economy that is expected this year due to the impact of the COVID-19 pandemic has had a drastic impact on tax revenues, increasing the budget deficit. It said that spiralling debt-servicing costs can cause a sovereign debt crisis that will undermine the livelihood of every single South African. As a result of this, OUTA said it supported measures to bring debt under control and avert a debt crisis. It said it further supported NT’s decision to initiate a process of rationalising the cumulative cost of remuneration in the public service, declaring that government must do more with less and to drastically prune state expenditure without jeopardizing the fulfilment of basic human rights and exacerbating poor service delivery.
OUTA said that it was imperative for government to make South Africa more attractive for private investment by providing policy certainty, saying that this will help to stimulate the economy. It said that it was not convinced that the Minister of Finance and NT’s plan to stabilise debt is going to work unless universal political buy-in is ensured. It recommended a qualitative analysis of debt.
OUTA proposed the unbundling of monopolistic SOEs which would be coupled by intensive capital investment in SMME and township economies to promote self-reliant local economies. It said that SOEs have posed a significant fiscal risk for several years. The National Planning Commission (NPC) recently published a position paper with comprehensive recommendations for reform in the largest SOEs which need to be accelerated, it said. It recommended that the NPC’s four types of proposed reforms are urgently implemented in SOEs: (1) Governance, (2) Financial, (3) Structural and (4) Policy and Process.
OUTA said it welcomes the discussion on Zero Based Budgeting approach stating that it will help to achieve more fiscal room to manoeuvre to secure core service delivery and to preserve the provision of basic human rights. It recommended that a series of publicly inclusive debates be hosted in Parliament on the implementation of Zero Based Budgeting, adding that a clear and rational process with clarity about roles, responsibilities, thresholds, and timelines needs to be spelt out.
Lastly, OUTA noted the projected shortfalls in tax revenue due to the lockdown. Despite this, it submitted that government should refrain from increasing existing taxes and tariffs urging for the curbing of waste in the public sector instead. Performance and conduct in government have a significant impact on domestic and international investment as well as tax compliance. Consistently wasteful budget items must be eliminated or hugely consolidated. Auditor General of South Africa (AGSA) reports that on each of the key controls of leadership, financial performance and governance, accounting and executive authorities have failed to implement the AGSA's recommendations. Local government in aggregate is no longer financially viable in its current form. A review of the entire local government fiscal and operating framework. Section 139 of the Constitution’s remedies for dysfunctional municipalities are not being used adequately.
4.7.Budget Justice Coalition
The BJC noted that the pre-COVID-19 February budget proposals included reductions to baselines for government programmes of R66 billion in 2020/21, compared with the previous budget estimates, with further reductions to come of R195 billion in 2021/22 and 2022/23. It reminded the Committee that it submitted in February 2020 that the R1.9 billion of cuts planned to school infrastructure, the R4 billion to be shed from consolidated health expenditure, and the billions more cuts from public transport and housing among others, would be negative not just for those critical services, but for the whole economy. It said that that’s because well spent investment in these areas have positive multipliers for economic growth and human development.
The BJC stated that the COVID-19 pandemic and the protracted lockdown shows up the slow progress made in these areas, partly due to cuts applied in the budget in recent years and partly due to poor implementation by government departments. It submitted that significant additional expenditure is required to ensure that the health sector, schools and communities can cope with and adapt to the additional burdens created by the pandemic, while workers, businesses and communities require significant support to survive these trying times.
Despite these needs, the BJC argued, the adjustments budget allocates only R36 billion of net additional funding to the non-interest expenditure baseline which includes only R2.9 billion of new funding to the entire health sector, and an overall net reduction of funding to the basic education sector of R2.1 billion. It argued that despite the President’s high level commitments to end GBV, the budget was completely gender-blind. At the same time, the BJC pointed out that the R50 billion of additional funding committed for social grants has been reduced to R41 billion due to exclusionary criteria for the COVID-19 grant. It pointed out further that billions more Rands have been cut from infrastructure projects despite the government's stated policy of using infrastructure spending as a lever to economic recovery.
The BJC said that it defined these decisions as part of the government's programme of reducing social expenditure to prioritise the repayment of public debt, as a self-imposed austerity programme. It argued that the economics and politics of austerity are flawed and pointed out to other countries where austerity has harmed their economies, pushing innumerable costs down the line and undermining socio-economic gains achieved to that point.
The BJC submitted a multitude of alternative options for closing the gap between revenue and expenditure, which include:revenue raising measures, including solidarity taxation of wealth, income from wealth and high incomes, alternative borrowing options, including from the overfunded GEPF and the overfunded UIF, reprioritisation of spending to limit wastage and corruption and boost economic growth, which in the medium and long term is the surest solution to creating a stable debt-to-GDP ratio and recovering up to R250 billion annually in lost taxes such as illicit financial flows by enhanced collaboration between SARS, NT and the SARB, backed up by political will.
It said that these proposals will enable South Africa to embark on a transformative stimulus programme which includes progressive social reforms, such as the implementation of a universal basic income grant, universal health care, and the improvement of other public services to meet people's needs, especially the needs of women and children.
4.8.Congress of South African Trade Unions
COSATU’s submission noted that South Africa is facing its greatest economic crises in living memory; that even before COVID-19 pandemic and the lockdown the economy was in recession, that the country’s level of unemployment is rising and that SOEs andmunicipalities are collapsing.
The Federation’sconcerns are that, (1) no new economic relief measures were announced in the 2020 special adjustments budget, (2) that there is no stimulus plan, (3) thatlittle clarity was provided with regards to the infrastructure and job creation programmes, (4) that no plans were presented on how to tackle corruption and wasteful expenditure, (5) that no plans were presented on how to get SOEs back on a sound footing, (6) that no new economic regulatory interventions were announced, (7)that there are no measures to further capacitate SARS to address tax evasion or introduce additional revenue, (8)there was no clear road map on measures to grow the economy and increase revenue and (9)the were no measures to reduce the wages of politicians and management.
Some of the key interventions that COSATU had hoped to see in the2020 special adjustmentsbudget includea bold R1 trillion stimulus fund, resourced by both public and private sector funding; a clear R1.6 trillion infrastructure programme over the next three years, jobs being at the heart of all government programmes, financial relief for employers being conditional upon job retention and incentivised for job creation, interventions to unlock the R200 billion made available through the banks, clear interventions to reduce the R150 billion lost in the fiscus to corruption and wasteful expenditure annually, a massive buy local campaign for the state, private sector and consumers, key long delayed regulatory and other structural economic interventions e.g. the delays in rolling out spectrum, water licensing, resolving the delays in the ports, crises in Metro Rail and fast tracking engagements with the private sector on how to unlock domestic investment through impact investments and Regulation 28.
4.9.The C19 People’s Coalition
The C19 People’s Coalition is an emerging collective which was formed in response to the COVID-19 pandemic. Its Programme of Action commits to ensuring that South Africa meets the coronavirus crisis in ways that prioritise those who are most vulnerable. C19 said that it opposes the special adjustments budgetbecause it fails the test of human solidarity.C19 acknowledges, however, that the revised fiscal framework occurs in the context of a once-in-a-century social catastrophe as a result of the COVID-19 pandemic and the lockdown.
C19 submits that the adjustments budgetis not pro-people and it fails to show solidarity with SA’s poor and working class. Instead, the special adjustmentsmade dramatic cuts in budget areas most crucial for poor and working class people. These include a R2 billion cut from the department of Basic Education, R9.9billion from Higher Education and Training, R2.3 billion from Human Settlements, R2.4 billion from Agriculture, R2.9 billion from Land Reform and Rural Development. It is concerned that the budget indicates no movement towards inclusive growth or progressive taxation needed to reduce high levels of inequality. Another concern is that the Department of Health, the primary concern in a pandemic, has only R2.9 billion of net additional funding for the entire health sector, which is less than half of the new funding allocated to the South African National Defence Force (SANDF) and the South African Police Service (SAPS).
The Coalition recommends a clear and urgent communication on the state of relief measures in general and in particular on the COVID-19 Social Relief of Distress (SRD) Grant, dropping of the unethical exclusion criteria for conditional grant recipients by South African Social Security Agency (SASSA), addressing the massive shortfall in funding to grants, back payment of all those who applied for the COVID-19 SRD Grant, regardless of when the application was made, a commitment to a Basic Income Grant (BIG)which could be financed through an increased corporate tax or a natural resource tax, fixing the Patent Laws, an immediate audit all public debt including the 2010 World Bank loan to Medupi and increase in taxes such a wealth tax on the wealthiest 1 per cent, an annual progressive wealth tax between 3 and 7 %and a 10 %increase in Personal Income Tax on the top 2 %of earners, which could raise up to R40 billion. It further recommended that anti-tax avoidance measures need to be substantially reinforced.
4.10.Children’s Institute at the University of Cape Town
The Children’s institute concern is that in May 2020, the President signed the National Strategic Plan on GBV and Femicide (GBV-F NSP), but the financing plan is not yet provided even though it includes targets for service delivery in 2020/21. It argues that without a budget, the GBV-Femicide NSP cannot achieve the changes to improve response and reduce re-victimisation.
The other concern is that the adjustments budget makes no mention of violence against women and children. Despite the President’s commitments to address the levels of GBV and femicide and violence against children, funds to back that have not been announced. Instead the Children’s Institute see cuts in the National Prosecuting Authority (NPA), Court Services Programme within the Department of Justice and detective services within the SAPS. These cuts, it argues, could negatively affect the prosecution and conviction of crimes against women and children, and the provision of support services within Thuthuzela Centres.
The Children’s Institute recommends thatthe NTshould present a funding framework for the GBV-Femicide NSP.Additionally, NTmust issue direction to provinces on the protection of programmes to address violence and support women and children who have experienced violence.
The Civil society’s mainly focusses on implications for food security and land reform. The organisation acknowledges that the Minister of Finance tabled this budget at a time when the fissures of unresolved historical inequality, poverty and suffering are made so much sharper.
Civil Society views NT’s objective of going from deep debt to a budget surplus within four years as short-sighted and unlikely. It argues that the budget is doubling down on the strategy of permanent austerity measures, which it vows to resist in the medium-term budget framework. Civil Society also opposes the deep cuts made to the budgets of the Department of Agriculture, Land Reform and Rural Development (DALRRD) and the Department of Environment, Forestry and Fisheries (DEFF), redirected to military and police spending.
It calls for (1) the full restoration of funds taken from household and local food security programmes in DALRRD and DEFF, (2) more active participation of popular rural movements, small-scale farmers and fishers, and other civil society organisations in decisions on budget allocations and programmes, not just as recipients of decisions made by the government and (3) state capacity and budgetary support for agrarian reform that explicitly acknowledges the serious climate, biodiversity and related ecological crises by promoting ecologically and socially sustainable forms of production and the role of small-scale producers.
4.12.Institute for Accountability in Southern Africa
Mr Paul Hoffmansubmitted that hunger in the land, in particular malnutrition in children, should be addressed urgently by ending the scandalous wastage of a third of all food produced.He is concerned that far too little of this food is recovered and made available to the poor via the existing Food Banks in the land. He recommends that the expansion of Food Banking should be the subject of an urgent tender process managed by an effective and efficient department of state that is equal to the task of ensuring surplus food gets to hungry people in the most economical manner possible.
Mr Hoffman’s advocates for a BIG, referring to the grant’s experience in Namibia. He said that the need to address long term unemployment in South Africa both suggest that the R350 per month COVID-19 relief grants should be extended to meet the impact on the poor. He recommends that government should explore other sources of income than the fiscus to fund hunger alleviation and the BIG. He also said that it is parliament’s responsibility to generate political will to recover the loot of state capture and the maladministration uncovered by the Auditor General.
4.13.Prof Geoff Everingham
Prof Everingham of the UCT’s submission on the 2020 Revised Fiscal Framework deals briefly with just one aspect, namely the current negotiations regarding public sector remuneration.He said that the rationale behind this submission is that monetary and fiscal policy are the main levers open to the government and the SARB in dealing with the impacts of the COVID-19 pandemic on the households.
According to Prof Everingham’s basic principle is thatthe action of the SARB in reducing interest rates by 275 basis points significantly reduces the cost of household borrowings, and this should be factored into the negotiations regarding public sector increases. He believes that without any salary increase, a public servant will effectively be up to 8 %better off, based on an example of a public servant with a taxable income of R584 201 per annum, who pays a bond on a R1 million, at a 10 %interest rate and has no other borrowings, before the pandemic. Also, that even if remuneration were to be cut by 5%, the public servant would still be 2.6 %better off after tax and interest.
He acknowledges that the benefit of the 275 basis points cut in interest rates will help those who have borrowed the most and that taking savings in interest costs into account in wage negotiations works unfairly against those who have been prudent and not taken on credit; and also does not allow for those who have chosen to rent rather than buy. Realistically, however, persons who have not borrowed, or have modest amounts of debt are already better placed to weather the crisis.
4.14.Mr Peter Meakin
Mr Meakin said that the Minister of Finance seems to have forgotten that the Constitution promises to end poverty, involuntary unemployment, corrugated iron suburbs and the state subsidy of land prices. He argued that section 229 of the Constitution provided that taxes cannot be levied which “materially and unreasonably prejudice national economic policies”. He added in his 2018 MTBPS the Minister stated that income taxes and VAT were so inefficient that they must be replaced by a 100 %tax on land rents.
Mr Meakin pointed out that Nobel Economic Laureates were signatories to a letter to the President of Russia in 1990 to adopt land taxes. He said that Hong Kong and Singapore were amongst the richest nations per capita in the world and relied on land taxes.
He said that the introduction of land taxes will transform South Africa into a tax-haven where people are taxed on their land, not what they do on it. He argued that income taxes were inefficient R762 billion could be saved if land taxes replace income taxes. He further estimated that government debt could be repaid in four years from revenue raised from land tax. He also submitted that the introduction of land tax will make the price of land more affordable and accessible.
Mr Meakin also urged government to make use of section 224 and 225 the Constitution which authorise the SARB to print money to fund thousands of houses and flats to rent as section 26 of the Constitution demands. He said that this was not quantitative easing because money is not spread about without any assets being added to the SARB’s balance sheet.
4.15.Mr Aboobakar Mahomed Kharva
Mr Kharva’s concern is that debt has become unsustainable but the Minister of Finance is not addressing it constructively. He is of the view that Zero Based Budgeting will not solve the debt problem. He recommends that NTshould budget for surpluses of a cumulative 3 %in over the medium term.
Mr Kharva does not support borrowing from the IFIs because that exposes the country to risks. He believes that there is much more room to cut expenditure and raise R120 billion required revenue internally. Mr Kharva recommends that there should be strict monitoring of expenditure and phasing out of the tender system for procurements. This, he argues can drastically reduce expenditure at all levels of government.
On monetary policy, Mr Kharva’s view is that there is more room to cut interest rates to stimulate the economy and generate VAT revenues.
Mr Kharva said that the amendments are required to the Usury Act and the National Credit Act to divert excessive interest payments to goods and services on which VAT revenue can be raised. He believes that by introducing very strict laws and capping interest rates at a maximum of 12 %per annum on all types of loans and credit by commercial Banks, financial credit providers, micro lenders and loan sharks, hundreds of billions of Rands can be rechannelled to the sale of goods and services.
In terms of tax revenue Mr Kharva recommends that individual tax rates for persons earning above R2.5 million could be increased by 2.5 %to 47.5 %. While sin taxes could be increased by 100 %and set very high fines.
4.16.Mr Moses Moadira
Mr Moadira submits that the “hippopotamus mouth” referred to by the Minister of Finance in his 2020 special adjustments budget speech is this destructive creature composed of the following elements; corruption, blatant disregard of the rule of law, unashamed looting of state resources, mistaking positions of responsibility for positions of power, impunity, filling top management positions on the basis of political connections and preference and not on the basis of relevance and competence.
He recommends that a definite and decisive action with clear and unambiguous objective supported by well-defined time frames and deadlines should be taken forthwith with regard to zero tolerance to corruption, misuse of power and self-enrichment, putting the interests of the country above party political interests, embracing excellence and punishing mediocrity and impunity, contrary to the current culture which does exactly the opposite and considering the reality of the present darkest economic period in the history of our country.
He said that provision of additional equitable shares to municipalities should be reconsidered given the ever increasing figures of irregular and unauthorised expenditure as reflected in Annual Financial Statements (AFSs) of municipalities each year.
Mr Moadira’s pointed that it is not possible for an individual to be a politician and a technocrat at the same time, that top posts in an organisation does not translate into positions of power but that of accountability and responsibility, that political appointments and interference in administration breeds ill-discipline, total disregard of the rule of law and impediment to consequence management, and that local government is a specialised field that needs not only specialised and pertinent qualifications but also pertinent experience in local government. He recommends that the issue of professionalising the public service should be revisited.
5.National Treasury responses to the public submissions
The NT responded to the key issues raised by the stakeholders on 03 July 2020. NT noted that key comments emanating from the stakeholder’s submissions were about austerity and stimulus, tax policy, spending, reforms and financing.
On fiscal policy, NT said that South Africa’s stance has been expansionary for more than a decade and that the adjustments budgetpresents the most expansionary budget in many years, characterised by unprecedented expansion of the fiscal deficit and increase in borrowings.According to NT, this expansionprovides one of the most robust responses to the COVID-19 pandemic among developing countries. NT acknowledges that South Africa cannot use the pandemic as an excuse not to address weak public finances and achieve higher growth rates in the future. Also, it confirmed that higher government spending has not translated into higher growth in the past decade.
NT’s response to the austerity versus stimulus debate is that it is a false choice and that it does not make policy according to this paradigm. It believes that reprioritisationis a prudent and appropriate approach to funding part of the relief measuresannounced by the President on 21 April 2020, in line with practices in numerous countries worldwide and provides an opportunity to address waste and reduce non-priority spending in government.
On selected observations from the public submissions, NT said that the rejections of the “active scenario” ignore the prospect and implications of a debt crisis. NT highlighted that while the consolidation effort will be challenging, there are upside risks in respect of potential economic growth measures.NT also submitted that calls for more government spending are based on the incorrect assumption that South Africa suffers from short-run cyclical demand challenges rather than long-run structural weaknesses in the economy. NT further submitted that higher government spending and borrowing has not led to higher growth in many years and that South Africa should not confuse people’s desire to lend us money with our ability to pay it back.
In response to the question of whether GEPF can be used to fund the response, NT said that the GEPF exists to provide retirement security to about 1.3 million employees and 460 000 beneficiaries and manage governments pension liabilities. The GEPF’s funding position has steadily deteriorated since 2016 driven by lower-than-expected investment returns and introduction of new benefits and improvements to existing benefits. It further said that investments by the Fund are determined by the Board of Trustees in line with its statutory mandate. Forcing the Fund to invest in suboptimal assets will create a significant long-run challenges for future generations. Fiscal sustainability will not be achieved if we spend today what has been saved for tomorrow.
On interventions to support public infrastructure spending, NT welcomed the sustainable infrastructure development symposium intervention but highlighted current interventions such as the Budget facility for infrastructure and infrastructure delivery improvement programme.
On tax policy, NT noted that some comments stated that there should not be any tax increases while the economy recovers from the impact of COVID-19, while others called for additional tax measures to be introduced.Its response was that the 2020 special adjustments budget stated that there would be tax increases of R40 billion over the next four years to help stabilise debt and that the specifics of the tax increases will be announced by the Minister of Finance in the 2021 Budget. Also, that tax amendments over the last five years have included some of these proposals, with a higher estate duty rate for large estates and amendments to limit avoidance, alongside higher taxes on the wealthy through a new top personal income tax bracket and higher dividends tax and capital gains tax rates. However, all the additional proposals on tax measures are useful and will be considered before the 2021 Budget.
NT noted comments stating that there has been little uptake of COVID-19 tax relief measures. It provided preliminary data from the SARS up until 25 June 2020, which indicates that over 9000 firms utilised the deferral of pay-as-you-earn in April (over 7,000 in May) and the total relief for those two months was around R750 million. Also, the Skills Development Levy exemption has provided relief of R1.6 billion while the excise duty and fuel levy deferrals amounted to R7.5 billion. There were also 255 applications on a “case-by-case” basis for relief and of those 167 have been approved to the value of R1 billion and that there were 434 SMME vendors who took advantage of filing VAT returns on a more frequent basis to access VAT refunds more timeously.
NT’s response to spending comments was that unsustainable spending has harmed economic growth and higher debt. It further indicated that recent spending has raised aggregate economic risks, and with it, the cost of borrowing in the economy as a whole. This has resulted in reduced investment by the private sector and has led to slower growth and less employment.
With regards to economic reforms, NT emphasised that structural factors continue to constrain the economy. In addition to fiscal consolidation, debt stabilisation will require removing structural constraints to growth. To address these issues, government is implementing reforms discussed in the document titled “Economic transformation, inclusive growth, and competitiveness: towards an economic strategy for South Africa”. Key element of the reform agenda are modernise and reform network industries, re-orientate trade and industrial policies and pursue greater regional integration to boost exports, employment and innovation, lower barriers to trade to enable business to start, grow and compete and enable labour intensive sectors to achieve more inclusive growth.
With respect to financing and contingent liabilities, NT emphasised that the growth in national government debt is crowding out private investment which could have resulted in new job creation and increased revenue and that government is not generating enough revenue to repay accumulated debt. NT also emphasised that more borrowing is done to repay debt and interest creating a vicious cycle that could lead to a “sovereign debt crisis”. If debt does not stabilise, government will be unable to borrow at affordable rates. SOEs finances were weak long before the emergence of COVID-19, running negative cash balances owing to poor financial performance. Reforms planned include rationalisation, equity partnerships and stronger policy certainty and implementation. Planned transfers from the fiscus will be strictly conditional on improving their balance sheets. NT said that South African Airways will require no further action in terms of bailouts except for settling guaranteed debt as entity is insolvent and Business Rescue Practitioners (BRPs) have not released turnaround plans. Alexkor will be closed and mining rights will be transferred to African Exploration Mining and Finance Corporation. Other SOEs will either be retained, fixed, consolidated or repurposed.
NT indicated that the MTEF process will be guided by the principles of Zero Based Budgeting. This will be applied as a series of overlapping evaluation exercises targeted at large programmes.The currentsystem of spending expenditure reviews is a promising start towards Zero Based Budgeting. NT said that there is a need to connect the spending reviews to the budget process in a more meaningful way to achieve Zero Based Budgeting. NT said that whilst there is currently no recent literature on the implementation of Zero Based Budgeting by government institutions. There are however, lessons to be learnt from government institutions that have applied Zero Based Budgeting before. In addition, the NT is consulting with external experts in the field.If efficiently implemented, borrowing the principles of Zero Based Budgeting could result in a more efficient allocation of resources within government programmes and in line with policy priorities and economic constraints. Challenges in implementing the principles of Zero Based Budgeting include time and capacity constraints to complete Zero Based Budgeting within a budget cycle. Government may set up a separate process for applying the Zero Based Budgeting and only borrow principles instead of fully implementing the Zero Based Budgeting.
6.Committee’s observations and recommendations
6.1.Colloquially, it is useful to speak of a “supplementary budget” but the Money Bills Act does not have such a term and refers to an “adjustments budget” so in this report we refer to the 24 June 2020 budget as a “special adjustments budget” to distinguish it from the pending October 2020 MTBPS and adjustments budget.
6.2.A very significant part of the submissions received from the stakeholders deal with appropriations issues and will be referred to the Select Committee on Appropriations (SeCoA) to process. However, there are some issues that fall within the SCoA that this Report draws attention to below for further possible processing by that Committee.
6.3.The Committee is aware that the special adjustments budget is a “bridge” to the October MTBPS and is in a way a “transitional” budget, but in the absence of a clear economic growth framework within which to locate the special adjustments budget it is very difficult to evaluate this budget. The President constantly draws parallels between the COVID-19 crisis and the post-1930s depression and post-World War II periods and speaks of a more state-led growth path. Without drawing artificial barriers between the President and NT, since the President is ultimately responsible for the budget, the Committee believes that the special adjustments budget does not reflect this adequately. On 21 April 2020, the President announced "further economic and social measures in response to the COVID-19 pandemic" consisting of three phases. The President said that the first phase began in March when the lockdown began with a broad range of measures to mitigate the worst effects of the pandemic on businesses, communities and individuals. He explained that the first phase measures included tax relief, the release of disaster relief funds, emergency procurement, wage support through the UIF and funding to small businesses.
6.4.As part of the second phase he announced "a massive social relief and economic support package of R500 billion, which amounts to around 10% of [South Africa's] GDP". The Committee regards this special adjustments budget as part of the second phase which President Ramaphosa said was aimed at "stabilizing the economy, address the extreme decline in supply and demand and protect jobs". The National Treasury has themed this special adjustments budget as "building a bridge to recovery beyond COVID-19". The Committee therefore sees this special adjustments budget as a transitional intervention to stabilize the economy and stem the decline.
6.5.The Committee also awaits the "third phase" of economic and social measures which the President said will consist of "the economic strategy we will implement to drive the recovery of our economy as the country emerges from the pandemic". The President said that "the economic recovery strategy will be the measures we will embark upon to stimulate demand and supply through interventions such as substantial infrastructure build programme, the speedy implementation of economic reforms, the transformation of our economy and embarking on all other steps that will ignite inclusive economic growth". The Committee notes therefore that the third phase has not concretely been fiscally provided for in this special adjustments budget and expects the 2020 MTBPS and the 2021 Budget to take this much further. The Committee does regard these three phases announced by the President as inter-related. It is not clear to the Committee to what extent this second phase contributes to the third and we will be better able to tell following the October 2020 MTBPS and the February 2021 budget.
6.6.The Committee firmly believes that the private sector has an utterly crucial role to play in our collective economic recovery and that government should do everything possible to encourage them to play their full part. The Committee is also aware of the weaknesses and inefficiencies of the state, and that this needs to be addressed urgently, but there clearly needs to be a new, more effective relationship between the state and the market with the state playing a more active role in the economy than before as part of a new approach to an effective developmental state. It has to ensure that macro-economic policy suits developmental needs and fosters a balanced and inclusive economy. The budget, fiscal and monetary policy have to contribute to rebalancing the economy, and the state has to play a larger role in the allocation of capital towards manufacturing and services activities and away from speculative activities that increase volatility and systemic risks in the economy. The Committee believes it cannot, as the President also says, be business-as-usual. Given the horrific poverty that a significant part of the population is confronting and the considerable widening of the mainly racially-defined inequalities in the country, the state has no choice but to intervene and must do so. It is not clear to the Committee to what extent this special adjustments budget contributes to this, and the Committee will pursue this further with NT.
6.7.While the Committee welcomes the R500 billion package, it believes that this package is not enough to stimulate the economy. The funds are, understandably, shifted to departments fighting the pandemic such as Health, the SAPS, and the SANDF, taking away from those that are aimed at growing the economy and creating jobs such as agriculture, minerals and energy and, tourism. The Committee believes that fiscal measures for the economic recovery strategy announced by the President in April, will manifest in the 2020 MTBPS and the 2021 Budget. The special adjustments dudget does not provide enough clarity on infrastructure development projects – and this is utterly crucial to our economic recovery. NT needs to report on this at its next quarterly briefing. The Appropriations Committee also needs to consider taking this forward.
6.8.The Committee notes that the special adjustments budget is tabled in the midst of a grim global and local economic growth outlook never experienced before as a result of the COVID-19 pandemic. The Committee notes that while the COVID-19 pandemic is a global health crisis which has affected lives across the globe, it is also wreaking havoc on the global and local economies, particularly in poorer developing countries - shuttering businesses, disrupting global supply chains and causing millions of people to lose their jobs and livelihoods due to collapsed economic activity as a result of the socio-economic lockdowns. The pandemic has led to the sharpest global economic downturn, some say since World War II, affecting per capita incomes in over 180 countries. The Committee believes that the South African government acted decisively to prioritise the health and lives of all South Africans by introducing the lockdown measures aimed at curbing the spread of the disease. However, with the increasing number of COVID-19 cases and deaths, there are still huge uncertainties on the duration and intensity of the pandemic.
6.9.The COVID-19 pandemic has exacerbated an already weak fiscal position as the country lost its investment-grade rating in March, when it was downgraded by Moody’s and shortly thereafter by Fitch.
6.10.The Committee notes that this special adjustments budgetwas presented in the context of adomestic and global economic environment that has deteriorated significantly since the 2020 February budget because of the Covid-19 crisis. As a result of capital flight, most developing countries have experienced rapid depreciations of their currencies, including our own.
6.11.The South African economy recorded its third consecutive quarter of economic decline in the first quarter of 2020. The rate of joblessness has increased making it more difficult for the labour market to absorb new entrants.Revenue collection over the medium term is also expected to decrease with implications for our borrowing requirements and poverty and inequality levels are worsening. Post-COVID-19 estimates of poverty are much higher especially for those who are over the age of 18 and under 60 years and who are without waged work and live in absolute poverty without any social grant income. They are destitute, the majority are young, African women and many live in rural, informal areas and impoverished townships.
6.12.The Committee notes that NT expects the economy to contract by 7.2 % at least in 2020, compared to the Budget 2020 growth forecast of0.9 %.The 2021 growth forecast of 2.6% appears to be too optimistic given the uncertainty and the impact of the COVID-19 crisis on economic activity and the fact that South Africa entered its third consecutive quarter of negative growth in the first quarter of 2020. NT has confirmed that in the last ten years spending was predicated on an economic growth rate that did not materialise.The Committee recommends that NT and SARS should develop measures to mitigate against the risks of failure to achieve the projected revenue targets including by considering options that have been tabled on revenue generation so that developmental requirements and the financing of the deficit are managed in a way that ensures forex loans are kept to a minimum where necessary and are on acceptable terms.
6.13.The Committee notes that the budget deficit is now expected to more than double to 14 % of GDP (about R709 billion) in 2020, compared to 6.8 % of GDP (R368 billion) projected during the 2020 Budget. The Committee remains concerned that the budget deficit may likely widen further than projected due to the financial challenges at some SOEs, which are likely to worsen further in 2020 as a result of the COVID-19 crisis.
6.14.National Treasury’s expectation of a primary balance stabilisation in 2023/24 does not appear to be credible given the past experience of failure to close the “hippopotamusmouth”, which the Minister spoke about, and the fact that this forecast relies on return to fiscal discipline and faster implementation of economic reforms. The Committee recommends that NT presents a more realistic plan with a longer time frame, as moving too quickly to cut expenditure relating to key programmes will further negatively impact upon the economy, and cause more hardship and loss of jobs. The Committee recommends that the NT should provide the Committee with regular reports of progress made in achieving this target.
6.15.The Committee notes that the debt-to-GDP ratio will now reach 81.8 % (almost R4 trillion) in 2020 compared to a ratio of 65.6 % of GDP projected in Budget 2020. We are concerned that debt servicing costs now accounts for 21% of total government revenue and are estimated to reach 5.4% of GDP (R301 billion) in 2020/23. In dealing with debt levels, the Committee notes the argument that the cost of servicing debt is dependent on interest rates. The SARB needs to consider reducing interest rates and increasing the amount of sovereign debt it buys. Consideration needs to also be given to using the whole balance sheet of government - and the place of the UIF and PIC in this. We recommend that the Minister of Finance reports quarterly on the effectiveness of NT’s debt management strategies that would ensure that the level of debt stabilises over the medium term and avoidsa sovereign debt crisis.
6.16.The Minister of Finance should brief the Committee on progress made with the development of the State Bank.
6.17.The Committee is painfully aware of the severe financial constraints of the country, and the extreme unpredictability of the COVID-19 circumstances domestically and globally and that the whole world, let alone our country, is in unchartered territory. The Committee believes that all of us, whether in government, Parliament, business, trade unions or other sections of civil society need to work together like never before and we need to avoid polarizing our country. We urge NT to consult more with stakeholders and civil society, including those who disagree with it and be less dogmatic, while ensuring that the country does not sink into populist cesspool from which we will never recover. The Committee certainly welcomes robust responses from NT but NT needs to appreciate that Parliament has a responsibility, a constitutional duty, to provide a platform for and encourage the widest range of views to be freely expressed. While the Committee will continue to play this crucial role, we also request civil society stakeholders to engage in a "give-and-take" approach. None of us can be absolutely certain in this extremely unprecedented and extremely volatile situation that every proposal we make is the absolutely best one to get out of the crisis ravaging our country and the world.
6.18.The Committee is aware of a looming sovereign debt crisis and also wants to avoid that happening, as we recognize that ultimately it is the poor and low-income earners that will suffer disproportionately. The Committee’s views on the special adjustments budget should not be seen as reckless, populist, uninformed or naïve. They are directed towards balancing the stresses on the budget and addressing the immediate and longer-term needs to grow the economy, create jobs and significantly reduce the inequalities in our country, by also taking into account submissions received during the hearings.
6.19.While this is a special adjustments budget focusing on COVID-19, the Committee notes that very little has been said on the SOEs restructuring. The Committee agrees with the FFC recommendation that Parliament should receive reports on SOE reform plans given their downside risks on the fiscus. We also note theCommission’s concern about lack of information on SOEs restructuring and its consequences to the economy. The Committee will confer with the Portfolio Committee on Public Enterprises on a joint briefing by the Department of Public Enterprises and National Treasury.
6.20.The Committee is concerned about the rate at which unemployment is rising in South Africa, particularly amongst the youth. Compared to the fourth quarter of 2019, the official unemployment rate rose from 29.1% to 30.1% in the first quarter of 2020. Over the same period, youth unemployment rose from 58.1 to 59.0%, or 24 million individuals. NT estimated job losses between 690 000 and 1.79 million in 2020. The Committee recommends that NT reviews the current job creation initiatives such as the Expanded Public Works Programme (EPWP) and the Employment Tax Incentive to determine the extent to which these programmes have contributed to job creation and report on progress in the 2020 October MTBPS.
6.21.The Committee notes that the NT is working on the details of the R100 billion set aside as one of the economic support measures for job creation, to ensure proper processes were in place to roll out projects over the medium term. NT should provide the Committee with more detail regarding how the money will be spent, in which sectors, and what type of jobs will be created.
6.22.The Committee welcomes the allocation of R3 billion for the Land Bank’s recapitalisation after it defaulted on its debt obligations. The Land Bank is a strategic entity that should not be allowed to fail given its contribution to the agricultural sector, and its developmental and transformation mandate. The Committee notes that the Land Bank may require further support for it to become sustainable again. The Committee is aware that the Land Bank has not managed its role efficiently and effectively and will more rigorously monitor its progress in future. The Committee also recommends that NT also fufills its oversight responsibilities on the Land Bank far more effectively. The Committee requires a detailed briefing from the Land Bank and National Treasury on the challenges confronting the Land Bank.
6.23.The Committee believes that a key aspect of the government’s economic recovery strategy has to include reducing the high levels of monopoly and market concentration in the economy. It is recognized that some industrial sectors rely on economies of scale where oligopolies exist and this may make sense, but the state has to regulate where necessary. A key aspect includes the introduction of new entrants into key sectors of the economy from the disadvantaged sectors of society. As part of the efforts towards an inclusive economy, government must also ensure that stimulus measures contribute to investments in the second economy, in small businesses and cooperatives, and in township and rural economies. The Committee is disappointed that there has only been a 3,5% take up of the loan guarantee scheme of R200 billion and that NT has had to renegotiate the lending criteria with the participating commercial banks. The Committee requires NT to expedite the process in this regard and make public the outcomes. The Committee recommends that the Minister considers the expansion of this loan guarantee scheme to directly include Development Financial Institutions (DFIs) being able to provide liquidity to projects that they are directly funding.
6.24.In line with the announcements of the President on 21 April and NT’s structural reforms agenda, the Committee believes that re-industrialisation and localization should become key pillars of our national reconstruction and inclusive economic recovery strategy and there should be significant emphasis on building our domestic productive capacity. There also needs to be a “buy local campaign” for the state, private sector and consumers.
6.25.Despite many promises, government has moved too slowly on assigning the high-demand spectrum and reducing the cost of broadband and other costs of doing business. NT needs to engage with the Department of Telecommunications and Postal Services on this. Given the desperate need for revenue, the Committee urges government to accelerate the auctioning of the broadband spectrum.
6.26.As stated in the Committee’s 2020 budget vote report on NT, the Committee welcomes the monetary policy and financial regulatory and stability interventions by the SARB, which have ranged from the reduction of the repo rate to its activities in the bond markets which have respectively lowered interest rates by 250 basis points and lowered bond yields from a high of 12.4% to around 9%. The Committee believes that there is still more policy space for the SARB to act to ensure liquidity and stimulate the economy. SARB should consider the feasibility of purchasing government bonds in the secondary market in order to stabilize capital markets and boost liquidity.
6.27.The Committee believes that the interest rates spreads remain high and commercial banks could consider cutting them in view of the unprecedented crisis confronting the country.The Committee needs to engage further on how the banks need to be approached on this.
6.28.The Committee notes that government will raise about R125 billion in loans from the international financial institutions in order finance the relief package. In our 2020budget vote report on NT, we stated that “While the Committee has severe reservations about government securing loans from the IMF and World Bank, it is not opposed to this in principle and understands that the exceptional circumstances of the COVID-19 pandemic have pushed government into this. However, the Committee cautions for prudence in the government’s engagements with the IMF and believes that government should be open and transparent about the conditions on which the loans are granted, including the terms of repayment. The government also has to be transparent about the implications of taking dollar-denominated loans, especially with the slide in the value of the rand since the onset of COVID-19 and the likely further decline in the exchange rate of the rand.” The Committee notes the Ministers’ assurances that NTwill not compromise the country’s sovereignty by agreeing to conditions that are unrelated to the loan repayment terms. The Committee recommends that the Minister briefs the Committee on the implications and terms of any loan from the IMF and World Bank.
6.29.With respect to Development Finance Institutions (DFIs), the Committee recommends that the PIC needs to consider the possibility of making funds available for the funding of long term projects prepared through DFIs.
6.30.The majority in the Committee believes that government should engage with all stakeholders, including the private sector on how to unlock domestic investment through impact investments and Regulation 28 of the Pension Funds Act. NT needs to consider creating the necessary regulatory mechanisms to ensure increased pension fund investments directly into infrastructure projects including real estate, which can unlock capital that currently is not finding its way into projects. The majority in the Committee believes there should be more engagement on the feasibility of prescribing assets for pension funds and will request a presentation by the Financial Sector Conduct Authority (FSCA) and NT on this when the FSCA releases the policy paper as announced by the Minister of Finance in his post-adjustmentsbudget briefing to the Committee. National Treasury should also consider how pension fund members can leverage their retirement fund assets to improve their personal financial circumstances, especially during the COVID-19 disaster.
6.31.The Committee notes that revenue collection in 2020/21 is now expected to be R304.1 billion lower than the Budget 2020 projections. The Committee notes that this will be the biggest contributor to the budget deficit and signifies the dire situation of a shrinking tax base as a result of business insolvencies and people losing their jobs. The Committee believes that there is a need for SARS and National Treasury to consider a variety of tax proposals presented by participants in its public hearings and key proposals by the Davis Tax Committee.
6.32.The Committee has repeatedly raised the need to tackle the illicit economy more actively and stem the flow of billions of Rands out of the country. Given the COVID-19 crisis, this has become more necessary than ever. The Committee reiterates its recommendation that the President considers establishing an inter-ministerial committee to tackle Illicit Financial Flows (IFFs). The work of this inter-ministerial committee should pay particular attention to aggressive tax avoidance including Base Erosion and Profit-Shifting (BEPS) by multi-national companies and its work should be jointly overseen by the relevant committees of Parliament.
6.33.Although this is not NT's responsibility alone and while we appreciate the weaknesses within the criminal justice system the Committee strongly recommends that NT be far more effective in tackling corruption. Those who exploit Supply Chain Management (SCM) processes and loot public resources need to be severely punished. The Committee welcomes the arrests of executives and others on the collapse of the VBS bank. The Committee will follow up with all the regulatory agencies involved and the law enforcement agencies on the Steinhoff matter where evidently billion of Rands were lost due to fraudulent activities. The Committee will also request a briefing by the Minister of Finance on the Mpati Judicial Commission of Inquiry into allegations of impropriety at the PIC. The Committee believes that law enforcement agencies, particularly the Asset Forfeiture Unit could easily apply civil asset forfeiture provisions of the Prevention of Organised Crime Act on many of these cases without having to wait for criminal prosecutions.
6.34.The Committee reiterates its recommendation from the Fiscal Framework and Revenue Proposals report of March 2020 that NT and SARS should more effectively explore boosting revenue by taxing income and profits from the digital economy. This has become more urgent as the digital economy is thriving as a result of social distancing measures imposed by the COVID-19 regulations and lockdowns. The Committee notes that South Africa is one of the few countries that are already collecting VAT from the digital economy. There are however challenges which are still being discussed at the G20 and the Organisation for Economic Cooperation and Development (OECD) in order to reach consensus on the taxing rights of countries when it comes to income derived from digital economic activities. The Committee will follow the developments on these international soft law measures and expects to be briefed by NT and SARS once some consensus has been reached.
6.35.The Committee requires NT tobrief it on why “Zero Based Budgeting” is being proposed, how will it be implemented and what its implications are.
6.36.The Committee understands the severe and unprecedented constraints on the budget but believes that in view of the hunger stalkingthe country, government needs to consider a basic income grant for those without any source of income at all, and requests the Appropriations Committee to take this further in its deliberations.
6.37.Thespecial adjustments budgetdoes not provide clarity on the infrastructure programme and government’s job creation programme. The Committee requests the Appropriations Committee to consider pursuing this further.
6.38.The Committee reiterates its recommendations that NT work with Nedlac to hold the long delayed Financial Sector Transformation Summit.
6.39.Many participants in our public hearings made submissions urging government and NT to reconsider its fiscal consolidation measures and provide credible demand-side interventions to stimulate the economy. There is a sense, it is argued, in which National Treasury claims that its budgets are expansionary when it has been implementing fiscal consolidation measures over some time now.In its response to these submissions NTsaid that: “Calls for more government spending are based on the incorrect assumption that South Africa suffers from short-run cyclical demand challenges rather than long-run structural weaknesses in the economy”. The Committee believes that NT should not be dismissive and needs to engage with them and provide them with information that NT argues these submissions lack.
6.40.Even by the standards of a very open and transparent parliament, the Committee does more to encourage public participation than is required by the rules of Parliament. However, we are constrained by the time constraints in the Money Bills Act (MBA) and the way the parliamentary calendar is organized. In the 2018 amendments process the Committee proposed a further review of the MBA and engagements with Parliament’s office bearers to create more space for public participation in the budget during this term as it requires changes to the way Parliament organizes its programme within a financial year. The Committee needs to take this further.
6.41.The Auditor General’s (AG) annual reports on the PFMA and Municipal Finance Management Act (MFMA) once again reveal the extent of mismanagement of public funds. While the AG’s Office has begun to act on its new powers it needs to be far more decisive far sooner.
6.42.The Committee expresses its appreciation for the excellent work performed by the outgoing AG, Mr Kimi Makwetu and wishes him well.
6.43.While the Committee fully recognizes the right of all South Africans to participate in the public hearings on the budget, it notes that the democratic composition of the participants was extremely unrepresentative of the country, even in the case of organisations that claim to represent the needs and interests of mainly African people. Parliament’s committee section needs to do far more to encourage more demographically representative participation in public hearings, including through providing the resources to civil society organisations to do so. Far too often it is the elites that participate in hearings – not that they do not have the right to do so – but there is clearly a need to ensure more participation from other strata in our deeply divided society. The Committee Chair is mandated to once again raise this with Parliament’s Committee section.
The DA opposes the Report and, briefly, emphasises:
- The current financial crisis puts at risk the basic services on which the poor rely every day. Government and parliament cannot be comfortable with endless additional borrowing when the result of this borrowing is that the state has fewer resources for dealing with the effects of poverty.
- Economic growth is the precondition for fixing our public finances, and for addressing poverty and unemployment. But the precondition for growth is a programme of fundamental economic reform to re-orient the state away from exerting stifling control over the economy, and towards a pro-growth policy framework. The current crisis has shown the very limited capacity of the state, including its inability to effectively process the additional temporary grant, the skills shortage, exacerbated by a “cadre deployment” policy. The state should limit its focus to its core responsibilities and functions, and should not undertake programmes that are already efficiently delivered by the private sector.
- The creation of a state bank is opposed.
- A full-blown sovereign debt crisis must be avoided at all costs. The Cabinet's commitment to achieving primary balance by 2023/24 should be welcomed and Parliament must hold the Executive to this commitment.
- Asset prescription is vigorously opposed and most likely illegal.
The EFF opposes the Report and, briefly, notes:
- The submissions of the Economists Initiative and Budget Justice Coalition are correct. NT’s pursuit of austerity will destroy the economy and it does not have a credible plan on how to develop the economy.
- The borrowing of money from the IMF and the World Bank is strongly opposed and despite NT’s assurances, this will compromise South Africa’s sovereignty.
- The establishment of a State Owned Bank is strongly supported.
The FF+ records its objection to the Report.
Report to be considered
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