2021 MTBPS: PBO & FFC briefing

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Finance Standing Committee

16 November 2021
Chairperson: Mr S Buthelezi (ANC)
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Meeting Summary

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2021 Medium Term Budget Policy Statement (MTBPS)

The Financial and Fiscal Commission (FFC) briefed the Joint Committees on Finance and Appropriations from both Houses on the 2021 Medium Term Budget Policy Statement (MTBPS).

The FFC welcomed the 2021 MTBPS tabled by the Minister of Finance, especially given the context of declining investor confidence compounded by the recent nationwide civil unrest, atop of a prolonged precarious country fiscal position. The presentation provided an economic overview and fiscal outlook of South Africa. The presentation noted that the recovery in employment had been extremely sluggish. The recovery in employment had yet to catch up with the recovery in general economic activity. The official unemployment rate increased from 32.6% in quarter one of 2021 to 34.4% in the second quarter of 2021. The number of unemployed persons increased by 584 000 in quarter two of 2021. The unemployment rate according to the expanded definition of unemployment increased to 44.4% in quarter 2 of 2021 which was an all-time high. The FFC commented on the 2021 Adjustment Appropriation Bill. The FFC supported the Bill and noted that the provision for wage increases, the purchase of vaccines were necessary adjustments. The FFC recommended a review of the structure of conditional grants. For local government, the FFC pleaded with coalition councils to shun adversarial politics and to place people at the centre of their decisions. Government should set in motion programmes and resources to capacitate new councillors. The presentation also discussed fiscal risk and the management of debt. The presentation discussed the compensation of employees in the public sector. The compensation of employees continued to be one of the largest expenditure items of the fiscus as it absorbed 41% and 47% of Government revenue in 2019/20 and 2020/21 respectively. Key drivers for the rising compensation of employees expenditure over the past years included the number of employees in the public sector and the size of increases in the adjustment of public employees’ salaries which has been increasing above inflation. The Commission recommended that the Government should develop a long-term plan and in an incremental manner address the unsustainable public sector wage bill and that the plan should seek to improve public sector productivity at a lower cost.

The Parliamentary Budget Office (PBO) briefed the Committee on the 2021 MTBPS. The presentation detailed the policy framework and plans, macroeconomic overview and risk to growth and development. The presentation went on to note the revised fiscal framework, debt outlook and revenue and expenditure. The MTEF spending priorities in the 2021 MTBPS had to take into account developmental challenges, as they would further delay the achievement of the MTSF Priorities. There was consistent policy direction with regards to economic recovery through structural reform. However, Government expenditure was necessary to crowd in investment into the economy. With regard to efficiency, effectiveness and performance it was said that Government was unlikely to achieve most of the targets. The decision to reduce headcounts and the proportion of the budget allocated for compensation needs to be managed carefully to prevent the negative effect on education, health and peace and security. This would also further slow down the achievement of targets set for the 2019-2024 MTSF. The 2021 MTBPS focused mainly on achieving a narrowly defined level of fiscal stability and increasing business confidence. Government support recovery and rebuilding of the economy in a way that increased aggregate demand through building the resilience to crises and spending power of the poorest households.  These measures to support households could form part of a strategy for structural economic transformation that deepened and diversified the productive base of the economy.

The Committee was concerned about the fiscal cliff. It was asked how far was South Africa over the cliff? The members of the Committee noted that the expected fourth wave was coming and that National Treasury was trying to factor that into the equations and the planning that it did. It was evident that the fourth wave might hit South Africa. It was asked if enough had been done in the budget to mitigate against the fourth wave should it happen? It was also noted that there was a possibility for further social unrest. Should that happen, how would South Africa and the economy be able to address that matter? Would South Africa survive that financially? It was asked of the FFC and PBO what contingency measures could be put in place to ensure that if anything of that nature happened again that Government would be ready? How best could Government prevent events of that nature? Should more contributions be made to the contingency fund? The members of the Democratic Alliance were concerned about the issues of the wage bill. The response received from National Treasury was that it could not tell the unions what to do and that it was not it was not the one to negotiate with the unions. The wage bill was the elephant in the room that neither presentation had addressed. The Committee noted with concern the mounting debt. It was worrying that currently the debt service cost was standing at about 12% and that would increase to 16% in the 2024-25 financial year. The Finance Minister said it in his speech that it was higher than the security and medical finances that were available in the budget. What was Government going to do? How was Government being advised on how to lower that debt service cost? The Committee discussed the issue of unfulfilled promises and consequence management. Government that sets all these targets and it sounded nice but nothing happened when those targets were set. Nothing happened when those targets were not reached. There was no consequence management. The issue of the separation of powers and cadre deployment was also an area of concern. Could the FFC and PBO see any time in the near future where the administration would be separated from politics? Finally, the Committee discussed the concerning trend of the inability of Departments to budgeted spend money. The example of the underspending in the Expanded Public Works Programme (EPWP) by the Department of Public Works and Infrastructure was given. Infrastructure was being spent on. Employment schemes were being created but there was gross underspending of the budget. What did the FFC and PBO make of that? The economics of it could not be right. What was that attributed to? What could be done?

Meeting report

The Chairperson greeted everyone who was attending the meeting. He welcomed the Chairpersons and members from the various Committees who were present. He welcomed the support staff and the media. He welcomed the FFC and the PBO.

The Committee Secretariat read the apologies into the record.

The Chairperson said that the members had a long day in Parliament and thanked the members for joining this meeting. It was appreciated. The Chairperson detailed the agenda of the meeting. The Committee would receive a presentation by the FFC and PBO on the MTBPS. Then the Committee would have deliberations after that. Both the FFC and PBO would be given 30 minutes to present and if they could do it in less than 30 minutes that would be appreciated. Both entities would only hand the meeting back to the Chairperson once they had finished their presentations. The Chairperson allowed the FFC to present.

Briefing by Financial and Fiscal Commission (FFC) on the 2021 MTBPS
Dr Patience Nombeko Mbava, Chairperson, FFC, made opening remarks. She thanked the Committee for welcoming the FFC to the meeting. She was also joined by Commissioners and management from the FFC. The FFC was there to present its submission on the MTBPS. She provided some context for the presentation. She would then hand over to the research team who would go through the presentation in detail. She noted that the recent economic green shoots exemplified by positive GDP growth in the first and second quarter of 2021 auger well for sustained economic recovery and a stable fiscal path. However, threats to economic recovery continued to mount with pre-existing structural bottlenecks that severely constrained growth. Intermittent energy supplies, unresolved corruption, poor policy making and execution culminated in the loss of confidence or increased borrowing costs for the bonds issued by the country. South Africa should seek to avoid withdrawing its fiscal support to vulnerable citizens and the domestic economy too early and still signal to the public that its debt levels are sustainable in the long run, by eliminating leakages and executing budget reprioritisations that were productive and constructive.

The FFC agreed that the revenue windfall should not be fully committed to further expanding expenditures that had already grown far beyond its means of revenue. Instead, the revenue windfall should be used to defray as much as possible the structural budget deficit and offload the growing debt service cost with redemption requirements. National debt and State-Owned Enterprises remained glaring binding constraint to growth and risk to fiscal sustainability. Debt service cost was the fastest growing expenditure line item with a 10% annual average growth rate over the 2022 MTEF. Debt service cost accounted for 12% of total consolidated total spending in 2021 rising to 16% in 2024-25. The detrimental effect of debt service cost crowding out social programmes could lead to the total collapse of basic and social services as funds intended for core spending were diverted to servicing debt. The FFC acknowledged the difficulties in moderating debt within a subdued economic environment. It recommended improvements in cost efficiencies of spending and closing the fiscal leakages to offset the growing deficit and debt. Therefore, the FFC welcomed the 2021 MTBPS tabled by the Minister of Finance and noted, in particular, the Government’s effort to maintain a modest expenditure while making sure that core spending areas were preserved. However, the FFC remained firm on its stance that the need to exercise financial restraint to achieve fiscal prudence should not come at a net cost of the socioeconomic conditions of South Africans and for them to regress. She handed over to the research head of the FFC who would take the Committee through the presentation.

Mr Chen Tseng, Head of Research, FFC, and a delegation from the FFC briefed the Committee on the 2021 MTBPS.

The FFC welcomed the 2021 MTBPS tabled by the Minister of Finance, especially given the context of declining investor confidence compounded by the recent nationwide civil unrest, atop of a prolonged precarious country fiscal position. The presentation provided an economic overview and fiscal outlook of South Africa. The presentation noted that the recovery in employment had been extremely sluggish. The recovery in employment had yet to catch up with the recovery in general economic activity. The official unemployment rate increased from 32.6% in quarter one of 2021 to 34.4% in the second quarter of 2021. The number of unemployed persons increased by 584 000 in quarter two of 2021. The unemployment rate according to the expanded definition of unemployment increased to 44.4% in quarter 2 of 2021 which was an all-time high.

The FFC commented on the 2021 Adjustment Appropriation Bill. The FFC supported the Bill and noted that the provision for wage increases, the purchase of vaccines were necessary adjustments where Government had limited discretion.

The FFC also commented on the 2021 Division of Revenue Amendment Bill for provinces and local government. For Provinces, the FFC believed that expenditure moderation should be followed by comprehensive report from the affected Government Departments indicating to Parliament how they intended to manage tighter budgets. The FFC recommended a review of the structure of conditional grants. For local government, the FFC pleaded with coalition councils to shun adversarial politics and to place people at the centre of their decisions. Government should set in motion programmes and resources to capacitate new councillors. The presentation also discussed fiscal risk and the management of debt. The presentation discussed the compensation of employees in the public sector. The compensation of employees continued to be one of the largest expenditure items of the fiscus as it absorbed 41% and 47% of Government revenue in 2019/20 and 2020/21 respectively. Key drivers for the rising compensation of employees expenditure over the past years included the number of employees in the public sector and the size of increases in the adjustment of public employees’ salaries which has been increasing above inflation. The Commission recommended that the Government should develop a long-term plan and in an incremental manner address the unsustainable public sector wage bill and that the plan should seek to improve public sector productivity at a lower cost. 

The FFC noted Government's efforts to maintain a modest expenditure growth while making sure that core spending areas were preserved. Gradual relaxation of Covid-19 economic restrictions, both locally and globally marked the beginning of much needed economic recovery in South Africa. The FFC largely welcomed the R59 billion upward adjustment proposed to the 2021/22 Budget, made possible by the in-year windfall tax collection in the mining sector. The FFC appreciated the difficult position under which the government finds itself concerning SOEs. Nonetheless, bailouts undermine the fiscal integrity of the budget and exacerbate sovereign credit risks for the country. The FFC noted the muted budget allocation growth rate to provinces and local government but emphasised the need to monitor the impact on social services delivery through regular reporting to Parliament.  The FFC would welcome the realisation of the intended outcomes as pronounced in the MTBPS for the 2022 MTEF and going forward, necessitating commitment from all, including investors, to act speedily together with Government.  The composition of government expenditure must change, but with tangible more-immediate benefits for South African citizens.

(See Presentation)

Briefing by the Parliamentary Budget Office (PBO) on the 2021 MTBPS
Dr Dumisani Jantjies, Director, PBO, made opening remarks and provided the background to the MTBPS presentation. He noted that the Covid-19 pandemic continued and the health, social and economic effects will continue to unfold over the medium term. A fourth wave of infections is currently hitting Europe quite hard, even though vaccination rates there were high. According to Minister of Heath, South Africa will be hit by a fourth wave in December 2021. This created even more uncertainty with regard to the forecasts in the 2021 MTBPS. There remains a global consensus that public sector action in the form of fiscal and monetary stimulus remains vital to avert further economic collapse.

However, the 2021 MTBPS proposes to impose tough fiscal consolidation, including lowering of social expenditure (Heath, Basic Education and Social Protection) in real terms over the medium term. The efficiency, effectiveness and performance of Government’s key plans have been poor and targets were unlikely to be met. Supply side structural reforms were unlikely to have an impact adequate to enhance growth in the medium term, therefore, they have to be complemented by measures to stimulate demand in the economy. Revenue collection so far for 2021 has been better than expected and has improved the fiscal framework but this revenue increase is not expected to continue. The question of where relief and recovery for the poorest households and businesses will come from is an important question that the 2021 MTBPS leaves unanswered. The PBO, as in previous years, is concerned about the credibility of the fiscal framework.

Dr Nelia Orlandi, Deputy Director: Public Policy, PBO, led the briefing by the PBO on the 2021 MTBPS. The presentation detailed the policy framework and plans, macroeconomic overview and risk to growth and development. The presentation went on to note the revised fiscal framework, debt outlook and revenue and expenditure. The MTEF spending priorities in the 2021 MTBPS had to take into account developmental challenges, as they would further delay the achievement of the MTSF Priorities. There was consistent policy direction with regards to economic recovery through structural reform. However, Government expenditure was necessary to crowd in investment into the economy. With regard to efficiency, effectiveness and performance it was said that Government was unlikely to achieve most of the targets.

The 2021 MTBPS was consistent with the policy direction of the 2021 SONA and the 2021 Budget Review with regard to economic recovery through structural reform. However, increased government expenditure would be necessary to crowd in investment from the private sector into the economy. The decision to reduce headcounts and the proportion of the budget allocated for compensation needs to be managed carefully to prevent the negative effect on education, health and peace and security. This would also further slow down the achievement of targets set for the 2019-2024 MTSF. There was a current global consensus about the need to increase resilience to crises, such as the Covid-19 pandemic in economies and societies. However, the 2021 MTBPS focuses mainly on achieving a narrowly defined level of fiscal stability and increasing business confidence. Government should also support recovery and rebuilding of the economy in a way that increases aggregate demand through building the resilience to crises and spending power of the poorest households.  These measures to support households could form part of a strategy for structural economic transformation that deepens and diversifies the productive base of the economy. Overall, the approach by Government to public finances has to take into account the current global consensus on the importance of the State in the economy, particularly during crises.

(See Presentation)

Discussion
The Chairperson thanked both the FFC and PBO for their presentations. He opened the floor for members to ask questions to the FFC and PBO on the presentations that had been made.

Mr S du Toit (FF+, North West) asked the FFC its view on the fiscal cliff? How far was South Africa over the cliff? He wanted the FFC to elaborate on that issue. He appreciated the presentation of PBO. It was important factors which it had mentioned that needed to be looked at. In this morning’s session it was said that Treasury was looking at certain factors like the expected fourth wave that was coming and trying to factor that into the equations and the planning that it did. It was evident that the fourth wave might hit South Africa. What was the PBO’s view? Had enough been done in the budget to mitigate the fourth wave should it happen? It was also noted that there was a possibility for further social unrest. Should that happen, how would South Africa and the economy be able to address that matter? Would South Africa survive that financially considering the high unemployment rates at this stage and the fact that the country’s debt level was so high? Unemployment was at an all time high. The economy could not afford anymore instances like that.

Mr M Moletsane (EFF, Free State) appreciated the two presentations. It came to his attention that the FFC was recommending the review of the structure of a division of revenue. He wanted to know from the PBO, what was their position on the structure of the distribution model of the division of revenue?

Mr D Ryder (DA, Gauteng) said that he was not going to appreciate the presentations because both of them were a little shallow. Neither presentation was getting into the meat. Both presentations were acknowledging that the Minister of Finance had very little wiggle room to work in. He had pointed out the issues of the wage bill in this morning’s session. The response received from Treasury was that it could not tell the unions what to do and that it was not it was not the one to negotiate with the unions.

Mr Ryder commented that in his house his wife ‘held the purse strings like Treasury held the purse strings in the House’ that the members sat in. The wage bill was the elephant in the room that neither presentation had addressed. He appreciated the fact that the FFC took the time to submit both a documentary analysis and also a presentation. He told the PBO that it should google the phrase ‘death by PowerPoint’. There was space for the PBO to adapt its presentations for the purposes of today’s meeting and maybe submit a supporting document in the background. That was a stylistic comment.

Mr Ryder noted that Dr Mohamed was the one who raised a few issues around the risk. That was something the FFC did not point to and did not get to was the risks going forward. The FFC had touched very lightly on them. He did not think anyone had addressed it. Dr Mohamed spoke about, as he always did, about the risk of inequality and social inequality. Everyone was ignoring the political risk. What gave rise to the July 2021 insurrection? That was not an isolated incident. In terms of what led up to that, he thought that there would be similar circumstances happening again in the near future. It was not in the too far distant future that South Africa would experience very similar issues that were used as an excuse for the July insurrection. Added to that was the outcomes of the recent local government election. He thought that the political risk in the country was mounting substantially. Neither presentation addressed that.

He noted that there was a short comment about the contingency fund. The fact that Government was allocating much lower amounts to the contingency funds compared to what Government used to allocate to that contingency fund. The country had used it several times recently when it needed to bailout SOEs. There was the promise that SOEs would not be bailed out any longer. The fact was that there were other matters that the contingency fund was supposed to be there to take care of. Matters that were more suited to the contingency fund taking care of. Those matters were very likely in most scenarios that futurists were looking at to come about. There would be no resources. SASRIA, who had done well historically, had been absolutely overwhelmed by the claims that it had recently faced. Was that a one-off event? He hoped so. What would happen when Government sat in this situation in a year’s time or eight month’s time when there was not a tax collection windfall? What would happen when there was no money left in that contingency reserve because there were insufficient resources being allocated to that? There was insufficient emphasis being placed on those risks, certainly, the political risks but also other risks that the country was facing at the moment. The fuel price was increasing quite dramatically and therefore the cost of energy was going up. Eskom was also not able to generate sufficient electricity. How much of a risk did that pose to the country? Certain analysts had spoken of a total blackout situation and cascading blackouts from Eskom which would leave the country in total darkness for between 10 days and four weeks. These were the risks that really needed to be looked at. He did not believe that Treasury had done sufficient work, in terms of fiscal framework and medium-term forecasting, in indicating what it was planning to do. He went back to discussing the wage bill. South Africa sat with a problem, and it was the elephant in the room. There was not enough being spoken about it by any of the organisations that presented in the meeting today. As a result of that, the FFC and the PBO needed to go back to the slides that defined what they did and remind themselves of that.

Mr W Aucamp (DA, Northern Cape) commented that in his household the minister of finance would not resign and that she would be there for all eternity. He had been covered by Mr Ryder mostly. He agreed that the elephant in the room was the public wage bill. It was growing. It was known why the public wage bill was growing. It was known what cadre deployment had done. It was known what the sorrow consequences of that was but still nothing was being done about it. The red lights had gone on it the past, warnings had been given but it seemed as if no one was listening to that. He expected the FFC to speak to Government and tell Government exactly what the risks were of continuing on the path of cadre deployment and having a totally bloated public service sector where a huge amount of money was spent on inefficient people. He directed his next question to the FFC. It was worrying that currently the debt service cost was standing at about 12% and that would increase to 16% in the 2024-25 financial year. The Finance Minister said it in his speech that it was higher than the security and medical finances that were available in the budget. What was Government going to do? How was Government being advised on how to lower that debt service cost? If it was going to increase and increase then Government would not be able to turn it around. Proper policies needed to be in place to assist the country to not go into measures that resulted in the increase of debt.

He raised the issue of the bailing out of SOEs. It was stated that it would not be done but unfortunately that had been said in the past as well then a few months later guarantees had to be paid out and bailouts took place. Unfortunately, Government could not be taken on its word all the time when it came to the promises that it made. The breaking of those promises led to the country having this incredibly high debt service cost that was being carried. Government needed to be advised on that so that there was a commitment to stay at the commitments. Government should not do the payment of monies into a bottomless pit with regards to the SOEs again.

He discussed the social development grants. The amount had been given up until March next year. It was said that something else would come in its place but no one had said what exactly the financial effects would be. From the moment that it was given it was known that even though the President or Minister might say that the grant would end at the end of in March it would not. It was very difficult to give something to somebody and then take it away. It was known that it was going to continue but there was nothing budgeted for that or planned for that in the future. It was just heard that something would come. There were no figures seen in the medium term or next financial year for that. What would the effect of thereof be on the budget?

He discussed the PBO’s presentation. He noted something alarming in the presentation that went to the core of the problems. In the presentation it used the following words ‘the efficiency, effectiveness and performance of Government’s key plans have been poor and targets are unlikely to be met’. He discussed land redistribution and the fact that only 10% of land had been redistributed. This was explained through a lack of funds and of corruption. The reason why there was a lack of funds was because of corruption and cadre deployment. On page 14, it said that Government was unlikely to achieve most of the targets that had been set. Looking at those few statements that were made South Africa was sitting with a Government that sets all these targets and it sounded nice but nothing happened when those targets were set. Nothing happened when those targets were not reached. There was no consequence management. The PBO stated what the problems were in this instance but nothing happened. There needed to be consequence management when even Government did not reach its targets. The picture looked very bleak. It was very bleak when Government did not reach its targets. Government had been poor in the execution of its plans. To expect with a new Minister and new local government being elected that all of a sudden those targets would be reached, it would not. He said that insanity was when someone did the same thing over and over and expecting a different result. The country would not receive a different result with this Government. Government needed to be held to the promises that it made.

Mr X Qayiso (ANC) had a number of questions to ask the FFC. The FFC recommended that Government to protect the local government equitable share as its continuous decline would compromise gains achieved in the progressive realisation of basic rights. This was not the first time that the FFC had said this. What did the FFC think were the reasons for this decline and the future growth that was reflected in the MTBPS? Was this what the FFC believed would address the challenges? The FFC’s analysis reflected that despite the positive growth prospects economic activity in terms of real GDP as of the second quarter of 2021 remained at a level last experienced in the last quarter of 2017. What did this analysis tell us about the projected economic growth figures in MTBPS terms? Whilst the FFC welcomed the collected focus on growth and infrastructure investment, the FFC went on to say that Government had a poor track record of impacts and outcomes. Many of the funded infrastructure projects were characterised by cost overruns, wasteful contracting, maladministration, malicious compliance and noncompliance, and completion delays and poor workmanship. What would the FFC suggest Government could change in the approach to dealing with these including oversight? In the recommendations, the FFC reiterated its stance on the need for the executive to report timeously on how social services were affected by low budget growth and historical budget cuts. Could the FFC elaborate on this point and how this impacted upon Government policy and programmes?

He then directed comments to the PBO. The PBO stated that the supply side of structural reforms were unlikely to have an impact adequate to enhance growth in the medium term. Therefore, they had to be completely complemented by the measures to stimulate demand in the economy. What informed this statement? What were the facts that the PBO could provide to allow the Committee to make a determination on this statement? On slide 17, the question was posed ‘is the view of risk in the 2021 MTBPS in line with global consensus?’. The PBO went on to express - in its slide - concerns in this regard. The PBO concluded by stating that Government’s approach to fiscal policy and risks had to take into account that public finances should support stability, resilience and economic development. This suggests that the FFC gathered on the ability of the MTBPS to address the matter of stability, resilience and economic development. He asked the PBO to explain this to the Committee so that it could understand.

Mr O Mathafa (ANC) said that he was mostly covered but there were a few questions he wanted to raise. His first question could either be answered by the FFC or the PBO. It was about the unrests that were experienced. Based on the Government pronouncements was there a sense that it had identified what most commentators referred to as social ills that could be seen as triggers that resulted in people joining in the criminality that took place? What contingency measures could be put in place to ensure that if anything of that nature happened again the Government would be ready? How best could Government prevent events of that nature? Should more contributions be made to the contingency fund? Or was there a sense that if these triggers had been identified then the country was moving in a direction that sought to mitigate such events? Most commentators also referred to poverty as one of the lead causes that could be blamed for those particular events arising in the democratic dispensation. The PBO also spoke on issues of poverty. On slide six, the PBO raised a concern that the MTBPS was silent on where the relief and recovery for the poorest households would come from. One member had spoken about the rising fuel price. Food prices were also increasing as a result of the petrol price increasing. Would it be prudent to consider inflationary adjustments to the grants that were already being allocated as safety nets to the poorest of the poor? To ensure that food insecurity and food poverty were not experienced by those that were vulnerable.

On slide eight the PBO reflected on the issue of acute malnutrition of children under the age of five. This sat at a rate of 7.1%. A rate that was higher than the 5% anticipated MTSF target. What measures in the medium-term fiscal framework could be put in place to ensure that these particular rates were not worsening over time? He discussed the professionalisation of the public sector. Previous speakers had spoken about that issue. He thought it was because they were part of the opposition that they would always hammer the negative aspects of the public sector but ignore the efforts being done by the executive. There were efforts being done in professionalising the public sector in order to create a capable State. Could the PBO say that it was picking up movements towards a capable State or were the efforts being implemented actually bearing fruit? One measure, that he remembered, was an audit of skill and qualification in the public sector led by Minister Mchunu. There were issues of the wage bill and there were issues of cadre deployment as the opposition called it but when it was done by them it was not called that. Was there any indication which showed that the efforts that were being made by the executive were actually bearing fruit?

He discussed the Government target of exiting the fiscal consolidation path by 2024. Was it realistic considering the hardships the economy was facing particularly the almost zero growth and the other pressures being faced? He raised the issue of the basic income grant. Most commentators, including the PBO, held the sentiment that under the current fiscal framework the basic income grant was not sustainable. What fiscal multipliers could be introduced to ensure that, be it growth or savings, would ensure that this important grant was not only implementable but also sustainable in the long run? With the view of dealing with those triggers that he had earlier on alluded to that could lead to the country being destabilised by opportunistic criminality. He thanked the presenters for the presentations made to the Committee.

Ms D Mahlangu (ANC, Mpumalanga) commented on the presentation by PBO. PBO had said that there was no pronouncement as to when the social relief grant would end. She disagreed with that statement. The pronouncement was made and it would end by March next year. The other thing she wanted to comment on was when one member said that the grant would not in end March. From what she knew was that the Appropriations Committee was the one that had made it possible, as an oversight Committee, to put pressure on Government. The Committee heard the cries of the South African people saying that the relief grant should be continued. The Committee was thankful that it continued. If the grant was to be continued Government needed to consider where it was going to make cuts and get money to do that. Treasury and Government needed to look at the sustainability of the grant. What type of country did South Africans want? Did Government want a social welfare State, something that would be there forever? Or the Committee could tell Government what it thought should be done to have an environment that was able to create jobs for people. People needed jobs and there needed to be an economy that was sustainable and stable. Both presentations identified areas of weaknesses and concerns. She noted that the FFC had continuous engagement with Treasury. All the concerns that were identified in both presentations the Committee agreed with. In her opinion it was like they were all over. The intention of the MTBPS was to reprioritise and as Government reprioritise it was saying that the focus needed to be in specific places and on specific challenges. The conditional grant needed to have conditions and those were non-negotiables. It was something that could not be negotiated or amended. People needed to stick to those conditions. Once again, as in every meeting, the Committee raised the issue of consequence management. If there was no consequence management then people would do as they wished. There would be a laissez-faire type of leadership or responsibility. The Committee did not want to see that. She said that the Committee could have a discussion about who would be the better manager as raised by Mr Ryder.

Mr A Shaik Emam (NFP) asked that with what had just been heard did Government ever engage all the different role-players because both organisations were telling the Committee a lot in this meeting. Did Government really engage? Did the FFC and PBO tell Government what it told the Committee? Was Government willing to listen to them? Did Government take the advice and guidance or not? Did the FFC and PBO believe that it was time, in order to address the socio-economic conditions of this country, that the policies were relooked at? Did the policy actually speak to the needs of the economy, the people and economic growth in the country or not? Could the FFC and PBO see at any time in the near future that administration would be separated from politics because in all honesty he could not. In principle that was the way it was supposed to be. Was that ever seen happening in practice? In practice a lot of things happened in this country was because people were employed by their friends and they belonged to the same party. All the parties did the same thing. Did the FFC and PBO see that coming to an end so that everyone could work together in the interests of the country? What mechanisms could be put in so that people were employed based on their capacity and ability to do the work? He commented that there were so many oversight mechanisms.

At local government there were internal audits, SCOPAs and various other oversight mechanisms. He heard member after member speak about consequence management. Government spent a lot of money on oversight. Clearly it was not working. It was just not working. What was the FFC and PBO’s view on that? He did not want to ask the question he asked last year about whether South Africa needed three spheres of government because now South Africa had gone to four. That was the way he saw it.

He discussed SOEs. Surely the SOEs were there for a specific purpose and his understanding was that they could be very successful. Would the FFC and PBO agree that the reason why SOEs were in the state they were in was because of interference and corruption? If they operated on business principles then they could be an asset and generate profits and income for the country. He had concerns. He needed to be guided on the decision making that took place. There were SOEs that cost Government taxpayers money year in and year out. Government went and sold lucrative Vodacom shares to bailout Eskom. His concern was that those people who had objected to it were voiceless. Yet the decision was still made.

He could ask so many more questions. Education, for him, was the key. Yet the quality of education in South Africa at the moment leaved a lot to be desired. There was a 60% dropout in the tertiary institutions particularly in the TVET colleges every year. Look at the amount of money Government was wasting. South Africa had a 44% unemployment rate. There was a steel shortage in the country and an abundance of other skills. The quality of education from a basic education level was low. It was not speaking to higher education. As a result, there was a 60% dropout in the first year. The quality of education the students were receiving was not preparing them for tertiary education. As a result, the skills that they were receiving were not good enough. The TVET colleges were not speaking to each other based on the skills needs of the country. Government wanted to keep on importing skills but there was a 44% unemployment rate in the country. If jobs were not created then economic growth could not be created. It was the jobs that was going to bring income, cause people to spend and the money was going to circulate in the economy. He noted that the automotive industry was a brilliant example of success. Government did not want to replicate that into the other industries. The cheapest of imports was coming into the country and that was not being stopped. Everything was imported today. Even sweets and toilet paper were imported in the country. Government did not want to deal with that. Imports were basically shutting down all the other industries. Should not charity begin at home to create jobs? To boost the economy measures should be put in place to protect the industries and create jobs but Government did not want to do that.

Mr Z Mlenzana (ANC) thanked the FFC and PBO for arming the members with the presentations. He had used their presentations during the course of the morning when dealing with National Treasury. That was deliberate. Some of the suggestions made were probing him to ask questions. He discussed economic renewal and transformation. His question was directed to both the FFC and the PBO. In terms of economic contributors there were a lot. What was it that the Committee could pick up? The MTBPS prepared the country heading towards the February budget speech discussions. He asked the FFC and PBO to arm the Committee going towards February. What economic contributors could be quickly put in place and implemented so that by the time the Minister tabled his first budget he would have been able to test such contributors? He listened carefully to the FFC talking about the adjustment in the Appropriation Bill. He coupled this with the discussion started by the Minster last week and even today. The Minister had spoken about ‘tough love’. The Committee understood that the restructuring of SOEs was urgent and was long overdue. It had to be prioritised. Could both the FFC and the PBO advise the Committee on what were the action related issues that had to be put in place preferably with timeframes so that the restructuring of SOEs could be begun to be realised. The reality was that when he interpreted what ‘tough love’ meant was that Government would remain loving the SOEs but at the same time there needed to be tough control so that it was not a ‘willy-nilly’ kind of arrangement. When one came along asking for a bailout Government would no longer just dish it out.

He agreed with the FFC when it spoke about the reviewal of the structure of conditional grants. Could the Committee see proposals, workable proposals? Moving from the baseline approach in budgeting to the zero-based budgeting had been spoken about. The reality was that it needed to move swiftly but orderly going towards the zero-based budgeting. It could not be that some baseline issues were just dropped. There would be some imperatives that could not just be undone. Was there a way that the Committee could be advised on how to apportion the programme going toward the realisation of the zero-based budget? It needed to be taken into consideration that the Committee had been crying foul about the allocations to provinces and in particular the municipalities. If the municipalities were able Government would like to realise the district development model between now and February. If it could be seen that the DDM was actually working then the Committee could say pump in money where it was needed most and where it would be used expediently.

The Chairperson said that he also had a lot of questions but he was going to bank them for future interaction. He touched on one issue raised by Mr Shaik Emam. The FFC and PBO did come to the Committee and provide very intelligent advice. The Committee appreciated all of the issues that they had raised. It might not agree with all of them and have their own views on them. The information provided by the FFC and PBO was based on research and the Committee accepted that. When the FFC and PBO had professional and intellectual engagements with National Treasury how would they evaluate that interaction? Was there value in those interactions? Were there things that Treasury considered? Or were they also able to convince you and reach agreement on certain things? He said that knowing full well about Treasury’s responsibility and the FFC’s and PBO’s responsibilities. There was one issue he did not know how the Committee would be able to deal with but he wanted the FFC and PBO to comment. This was the inability of Departments to spend money. There was a debate in Parliament this afternoon where it came out that there was so much underspending in the EPWP by the Department of Public Works and Infrastructure. Infrastructure was being spent on this side. Employment schemes were being created this side but there was gross underspending of the budget. What did the FFC and PBO make out of that? The economics of it could not be right. What was that attributed to? What could be done? He used the example of the Department of Public Works and Infrastructure because it was a debate in Parliament today. National Treasury would be coming with a second or third quarter performance. The Committee would see gross underspending. The Committee kept on receiving these reports and what did the Committee do about them? Departments never failed to provide excuses. He did not call them reasons. They were excuses of not spending money. He wanted to hear the FFC and PBO comment on that matter. The change of policy of the Department of Human Settlement from housing provision to the provision of services; did the FFC and PBO know of the unintended consequences of this change of direction? He was just using the example of Human Settlements. He said that the FFC would respond first. The FFC needed to be economic with their answers but not run away from what was asked. If it could not answer all of the questions then it would have to provide a follow up on the answers to the members. Then the PBO would follow.

Dr Mbava thanked the Committee for the extensive questions and engagement with the presentation. She responded to the question by Mr Aucamp. He asked whether the FFC’s recommendations were actually taken up by Government and whether those recommendations were influential. The FFC knew that it had a clear mandate. The FFC’s role was to advise Government on fiscal and financial matters as well as on the division of revenue. The FFC aimed, at all times, to ensure that its research was evidence based, well researched and cogent. The FFC were not influenced by the perceptions in the media or popular media. It presented research that was evidence based. It could only present the facts. She responded the questions on how the FFC’s engagement with National Treasury was when it came to its recommendations and how Government took those recommendations into account when planning. Did Government listen to the FFC? The FFC aimed to provide recommendations to Government on an annual basis. Those recommendations were well researched. With engagements with National Treasury, it was important to ensure that the FFC’s recommendations found expression in the budget and the division of revenue. That was not the only thing the FFC aimed for. If Government only looked at the recommendations through the narrow lens of the division of revenue then it was not actually fully implementing the entire mandate of the FFC. The FFC’s mandate went beyond just the division of revenue. The FFC also advised Government on financial and fiscal matters. Were those other matters taken up? If those other matters were not necessarily aligned to the division of revenue then where were those recommendations going? Did Government adopt those recommendations? That was the question that the FFC wanted to answer internally as well along with National Treasury. She delegated the rest of her team to respond to the questions asked.

Prof Lourens Erasmus, Commissioner, FFC, responded to Mr Ryder’s question about the risks. The FFC identified risks on debt servicing costs, the public sector wage bill and inefficient Government spending. The rate at which the debt grew was still faster than what the economy grew because of the interest being higher than the GDP growth. Government could not just save its way out of the debt by reducing the wage bill and be more efficient with public spending. Government could not simply stop spending. Government needed to continue with development initiatives, narrowing inequality and easing the suffering of the most vulnerable in society. Thus, Government spending needed to increase and it needed to be funded from the fiscus. Where to go from here? The economy needed to grow. The members raised the issue of social instability. The country could not afford social instability and think that the environment would be conducive for large-scale investment. There needed to be investor confidence. With investor confidence the Government should implement economic reforms that could unlock private sector investment and create jobs. National Treasury this morning admitted that private sector confidence was low. What was to be done to restore this investor confidence? Government policy should explicitly promote business in South Africa. It was something that Government admitted it was doing. The Deputy Minister had named several examples of how it was being pursued. Low investor confidence could increase by not only implementing the structural reforms that were seen from the medium-term budget but also by creating policy certainty on several issues that concerned investors. Public spending and the quality of public expenditure also needed to be looked at. Whenever public funds were spent it needed to enhance economic growth. There needed to be value for money with regard to public spending. He responded to the question about how immediate impact would be made with regard to the February budget coming. Government needed to look at the current tender system. It was filled with problems and needed to be addressed. There was no amount of regulation that could make a difference if the values of civil servants were not geared towards productivity. The rendering of effective services to all South Africans had a bearing on the division between the State and party.

Mr Tseng put forward two very important concepts. This related to why there was low growth and the way forward for growth. Firstly, Government needed to watch out for the ‘crowding out effect’. The second concept was the way the problem of growth was understood in South Africa. Was it a supply side problem or a demand side problem? If it was believed that it was a demand side problem then Government could spend away. If evidence suggests that it was a supply side problem then Government would want structural transformation because this was about the structure of the production function and the productivity of that production function. He put forward the facts. From 2007, Government spending as a percentage of GDP was 17%. By 2020 that was 22.5%. Government had been spending. Some might argue it was because of Covid. In 2019 Government expenditure was at 21% of GDP. Government had tried the demand side method of trying to stimulate growth and that had clearly not provided any evidence in terms of growth. There had been a long slow down in economic growth. He discussed the inability to spend on the EPWP. This issue was important as it also spoke to the overall infrastructure management deficiencies. How was Government doing with infrastructure? Government was not good at infrastructure delivery. Even in local government where it was closest to the people’s needs most of its projects and services deliveries were done through service providers. That created its own set of prices in the market and it crowds out the market participants. The market just takes on Government’s money to do very expensive projects and there was no competition. He discussed the FFC’s engagement with National Treasury and consequence management. The structure was oversight over the executive and the executive over the administrative. It took so long for either one of the three to take decisive action against whichever one it was supposed to hold to account. He stopped there and said there would be another chance to answer questions when the FFC engaged with the Committee on 23 November.

Mr Siyanda Jonas, Researcher: Local Government Analysis, FFC, responded to the issue of whether it was a growth problem or a debt problem. There was both a growth and a debt problem. In addressing, that Government needed to think of them as problems that had a potential to reinforce each other in order to address them successfully. It was both a growth and debt problem.

Dr Jantjies made two points. Earlier in the year one of the issues discussed with the Committees was around the issue of economic growth and economic development. The PBO emphasised there was the issue of economic transformation. The fiscal policy needed to be used to support the more productive sector. The PBO emphasised the issue of industrialisation and it needed to come from fiscal policy. The support to the economy needed to be shifted more to the productive sector. That was the point the PBO tried to emphasis in its presentation. The second point was that the PBO raised a lot of risks. The issue of support for social relief and support for lower income households was an important point. It should not be seen as not important. It should be seen as complimentary towards supporting economic development over the medium term. The stability in households and social stability which would be brought by support of low-income households should be seen as a part of fiscal policy. He discussed engagement with Government. The PBO had put out the request and was still waiting to discuss some of these issues with Government.

Dr Orlandi responded to Mr Ryder’s comments. The message that the PBO wanted to transfer to the Committee was in terms of the SOEs and the contingent liability. There still was a contingent liability although lower. This year there was a contingent liability of R12 billion. Over the medium term it was only R5 billion. This year, for the first time, there was an additional line item in the budget which was an unallocated reserve. That reserve over the medium term was for the 2022 budget year R15.1 billion, R28.8 billion and R29.3 billion. Government was saying that it would not be allocating additional funds for SOEs but it still provided an unallocated reserve which was quite high. This was in addition to the contingency reserve. In her mind Government indirectly did make provision for needs that might come up over the medium term in terms of SOEs or other disasters. The current payments of financial assets for SOEs were just what was provided for Eskom. She responded to Mr Aucamp. She noted that everyone was talking about the high COE budget. The reduction of the COE should be targeted. If there were people that were redundant then those people should be targeted and get rid of them to reduce the COE budget. Government could not take away from Health and Education. The implications of that could be seen. South Africa did not reach its targets. South Africa did not have educators that could educate children and provide them with skills on maths and science. That was what Government wanted. Government wanted to pass maths and science. It was very low at this stage. It was because of that fact that Government needed to import skills. She noted that in the beginning the PBO found that spending priorities being considered for the 2022 MTEF. There were things that had been identified by the Departments. These were the spending priorities. It was so incoherent that the PBO did not know what the Departments were going to do. For the Department of Basic Education, it said more policy decisions needed to bring compensation spending in line with available resources. That was not a spending priority. The Department still wanted to discuss and talk about it. Should the priority not be that all the lost time teaching students was recovered in terms of the lockdown? The same with the Department of Health. The Department of Health was saying that there were still discussions on how to respond to the future waves. At this stage there should not still be discussions because there was R900 million in the budget to be spent on Covid-19. The Department needed to know where it was going to allocate that budget and for what the budget would be used for. She discussed the medical interns. For months the medical interns were not placed because there was no money to pay for them. COE money could not be taken away from Health and then have all of these almost qualified doctors that could not be placed in hospitals. The same with the Department of Social Development. It just said that it was still going to do research to see how it was going to replace or improve the social grants. That was not what the PBO wanted to see in the MTBPS. The PBO wanted to see something concrete. What was Government going to do? Was it going to restructure the grant system or was it going to add to the conditional grant system? She discussed the issue of malnutrition. Did the people on the ground really know what the priorities were and were they doing their jobs? There were so many home-based carers. There were so many additional social workers especially with the additional money that was allocated. Why did they not identify those babies that were malnourished? It was about management and it was about people knowing what their responsibilities were.

She responded to the Chairperson’s comments about eh EPWP. Government had allocated all of these additional funds for job creation but the EPWP was already in place. The EPWP was not performing. Had Government gone through a troubleshooting exercise to know why the EPWP was not working? There was a huge EPWP budget for all the other sectors. However, EPWP did not perform and Government still gave additional money for all those sectors. There were also conditional grants. Each and every conditional grant had a section that it had to create jobs. Most of those jobs that it created were also funded through the EPWP. There was such a lot of duplication now in terms of job creation. That was why the EPWP could not perform. Government added money to create jobs. Departments freed up money that it was supposed to use and then reprioritise. It was almost like trade-offs being made just because Departments received additional money. The PBO would get another opportunity to also talk about this. The PBO did a pre-MTBPS report and there was a lot of detail in that report in terms of the biannual report on the targets that had been achieved and those that had not been achieved. The PBO also planned a new project to talk about all the targets that had not been achieved. In terms of the ethical state, most of those targets had been achieved but it was also debatable whether those indicators were the correct indicators. The ones not achieved in terms of the ethical state was based on the audit outcomes. She discussed the conditional grant reports that the PBO did. The PBO had done a whole series of conditional grant reports and identified a lot of issues with those conditional grants. There were issues of duplication, poor reporting, different provinces reporting differently and no targets being set in most of the conditional grants. There was definitely a need to look at the structure of conditional grant, the business plans and the schedules to the division of revenue because the reporting was also very bad. She provided an example from the Department of Transport. The reporting in the annual report of the Department of Transport were totally different numbers that the PBO found than what was in the 2021 division of revenue bill. The information was totally incomplete. The PBO would still send out the last analysis it did on the Transport conditional grant.

Dr Seeraj Mohamed, Deputy Director: Economics, PBO, responded to the question asking how far South Africa was over the fiscal cliff. This was the issue that arose all the time. National Treasury had spoken about crowding out. Unfortunately, he saw the FFC was also talking about crowding out. It was easy to say what was being put forward was evidence based if one through in a few numbers. It was a problem when those numbers were not contextualised. The interpretation of those numbers and what economic perspective was used was important. One of the things mentioned in the BPO report was to ask what the risks in the economy were. High debt and high debt service costs may be a risk. The risks were also about political, economic and social stability. There needed to be stability with the finances. There was a need to secure those as a way to ensure that there were no repeats of what happened in July. There was also frequent damage and often violent protests that occurred in communities. There were local government protects. There were service delivery protests. There was a need to provide basic services. There was the issue of debt but there was also what one used the debt for. It could be said that the interest rates were higher than the growth rates and that there was also going to be growing debt. The issue then was how to grow the economy. One of the important ways to grow the economy, and here he thought the FFC needed to look past simplistic views, was to recognise the problems on the supply side and the problems on the demand side. A lot of the problems in South Africa were structural on the supply side. The South African economy was a hugely concentrated economy. There had been deindustrialisation since the 1980s. There had been growth in services particularly finance even with more credit being extended to the private sector. There was a jump by about 10% leading up to the global financial crisis and it stayed at that level. Investment levels, however, stayed low. He commented on whether Government was crowding out private sector investment. The South African Reserve Bank Government Governor said that actually the private sector was sitting on money and not investing. The issue of crowding out was a red herring and was not something that the PBO should not actually consider seriously. Government needed to think about how it could move money out of finances and financial assets into productive sectors. This was where the demand side was very important. The PBO believed that the structural reforms were not enough because the structural reforms did not take enough account of the problems of the structure of the economy. One way to shift the South African economic growth path was to put money into the hands of the poorest households possibly through increasing social grants and also a basic income grant. This was a way to shift where the demand comes from, the demand for what kind of goods and an increase demand for goods from the productive sector that were more labour intensive and less energy and capital intensive.

He agreed with Mr Shaik Emam that there needed to be a support of local industry, local manufacturing and local businesses. He commented on debt and Government spending. Government spending was about 20% of GDP. Investment had been under 20% of GDP. A significant share of that investment came from SOEs and Government. The impact of Government consumption, Government capital expenditure and public sector capital expenditure from SOEs could not be discounted. Even if a lot of that may have been problems with corruption and wasteful expenditure that money went into the economy. The view of seeing crowding out and thinking of things in simple terms of supply and demand side did not see the economy as a dynamic being with a relationship between the supply and demand. When Government borrows and spends that much money goes to the private sector increases their profits and probably increases their likelihood to invest and to create employment. One of the big problems has been that there has not been adequate enough productive investment from the private sector. That was where structural reforms and demand side issues were needed. This was linked to exports or putting money into the hands of poorer households. That was where South Africa needed to shift and move to a different kind of economic growth path. One that was less driven by finance and financialisaton. The issue of debt and how far South Africa was from the fiscal cliff was not taking the country very far in thinking of how to improve the economy, how to create the jobs that deal with unemployment and could actually start shifting inequality.

He responded to Mr Qayiso’s question about what evidence did the PBO have that supply side structural problems were limited by aggregate demand in the economy. There were huge numbers of sources for this in international literature. He highlighted one international paper where it was noted that a lot of countries have tried to implement structural reforms, but the experience had shown that those structural reforms took a really long time to work. Sometimes the returns from that, when it did work in the long term, were not big enough to offset the damage that they could possibly cause in the short term because of the disruption and the costs of implementing them. The PBO raised in their presentation was the question of could National Treasury say if these structural reforms, in the absence of enough demand side, were actually not going to end up damaging the economy? The PBO had not seen evidence-based responses to back that up. He said if there were any other questions that the PBO had forgotten about they would address it in the future.

The Chairperson thanked the members for their engagement. He noted that in most cases with the debates the Committees had with Departments was about more money and more money. Issues that were raised here point more to other things to make Government not able to achieve what it wanted to achieve despite the appropriations that were made to Departments, provinces and local government. He thought that the Committees did not spend enough time looking at what was really happening. The Committee had been very superficial in some of its responses and had missed the point. He made the point of cadre deployment. Members liked branding that one around. The Chairperson had sat in many interviews while still on the executive. He did not remember a single one where it was asked of a candidate their political affiliation. It might be there in some instances but he thought using that as a reason for why certain things did not happen was an easy answer that members tended to gravitate towards. Perhaps in the bigger scheme of things there were deeper issues. There were the issues of the budget not being used and duplications. It would be good for members to have sight of some of those issues raised by Dr Orlandi. Where there was under expenditure, where there was duplications and issues of conditional grants. In this way the members could get deeper into why certain things were happening. He noted that it was about two and a half years in the current administration. The Committee raised issues and there was very little change in the behaviour. It the Committee was not careful it became a ticking the box exercise. The Committee needed to take the responsibility given to it by South Africans very seriously. The Committee had not seen improved deliverables on the other side. The members did need to look into that. There was no member who wanted to see people unemployed and inequality increasing. It affected everyone. There was definitely alignment irrespective of political parties when it came to that matter. Going forward, collectively and in individual Committees there needed to be a drive that was deeper in understanding. There needed to be a follow up on consequence management. As finance Committees it could not do all of these things but what did it do to ensure that other members in other Committees dealt with these issues. The Committee had the advantage of having a helicopter view of all the Departments. Other Committees did not have that luxury. He thanked the members for their engagement as it had been a long day. He appreciated their presence. He thanked the Chairpersons from the other Committees who were presented. He thanked the FFC and PBO for their presentations. He thanked everyone who was part of the meeting.

The meeting was adjourned.
 

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