2020 Pre-MTBPS: Parliamentary Budget Office briefing

Meeting report

The Chairperson welcomed everyone in attendance and noted an apology from Ms P Abraham (ANC) who will come to the meeting at 10:00 as she is engaging with protestors in her town. He announced that he would have to leave the meeting early due to a traditional leadership meeting in his community.

Briefing by the Parliamentary Budget Office (PBO)
Dr Seeraj Mohamed, Deputy Director: Economics, PBO, stated that the 2020 MTBPS is presented at a time of crisis for the economy and society. In South Africa, measures to address the crisis had an impact but overall there were large increases in hunger and hardship. The global pandemic continues and there is much uncertainty about global economic recovery. There is also the possibility of a second wave of COVID in the country. He elaborated on the global situation of public finances, highlighting a general decline in government revenues and increased government debts and deficits in both developed and developing countries. Many governments from both developed and developing countries have implemented quantitative easing, generally resulting in reduced borrowing costs and lower refinancing risks.

Ms Fatsani Banda, Economic Analyst, PBO, presented on the macroeconomic outlook for the global and domestic economy. The Global economy is expected to contract by 4.4% in 2020, primarily due to the COVID-19 pandemic. Emerging Market sovereign debt is also expected to increase significantly from the previous year. South Africa’s growth outlook has worsened since the February Budget was tabled. The South African economy is projected to contract by 8/%, reducing the economy to its 2013 size.

She elaborated on the latest trends on household consumption, highlighting the significant decrease in household consumption and real disposable income. The indicators dropped by 49.8% and 49.7% respectively in the second quarter (Q2) of 2020. This is associated with the impact of the pandemic and national lockdown. Overall, consumption by households contracted by 7.5% over the past year. The labour market trends show that 2.2 million people experienced job losses in Q2 of 2020. There was an increase in the non-economically active population by 5.2 million, which is concerning. The official real unemployment declined from 30.1% to 23.3%, which is attributed to the net increase the non-economically active population, which reduces the number of people in the labour force.

Ms Banda explained the impact of social grants on employment during the pandemic, highlighting the NIDS-CRAM survey findings. The additional government spending on grants was targeted to lower-income households however only 40% of grant applicants were successful at the time of the survey. It also found that even with the easing of the lockdown, job losses during the quarter were long-lasting. 

Mr Rashaad Amra, Economic Analyst, PBO, elaborated on the increased risk perception and borrowing costs of South African sovereign debt. In June there was an increase in the borrowing requirement for South Africa. Both its debt and borrowing costs have increased. South Africa’s projected budget deficit, debt and borrowing costs are higher than peer economies. It is projected to have the second highest budget deficit after Brazil. The PBO’s fiscal framework outlook estimates a higher gap between revenue and expenditure in 2020/21, than what was in the Special Appropriations Budget and the February Budget Review. Higher debt levels, slower revenue growth and higher borrowing costs result in debt service costs consuming a larger share of revenue over the Medium Term Expenditure Framework (MTEF).

Dr Nelia Orlandi, Deputy Director: Public Policy, PBO, presented the policy framework and plans. Due to the country’s economic condition, government had to review some of its medium term targets for 2024. Dr Orlani elaborated on the revised targets for GDP growth, the formal unemployment rate, number of employed, inequality gini coefficient and food poverty. In the State of the Nation Address (SONA), the President mentioned that crime has to be halved by 2024. He also indicated that every 10-year-old should be able to read for meaning. This target is still being developed after the first assessment.  She highlighted government’s policy alignment to international agreements by comparing the National Development Plan (NDP) 2030 with the United Nations (UN) Sustainable Development Goals and the African Union (AU) Agenda 2063 aspirations. She also elaborated on governments policy alignment to the 2019-2024 Medium Term Strategic Framework (MTSF) priorities, and District Development Model (DDM) objectives. She elaborated on the policy implementation over the medium term. There was slow progress with NDP targets in the first 5 years due to low integration of the 2014-2019 MTSF and the Strategic and Annual Performance Plans (SAPP). Consequently, NT issued a revised framework for SAPPs, which require Information on public entities, infrastructure projects and service delivery projects per district and conditional grant indicators and targets to be reflected in the new SAPPs. Lastly, she elaborated on the alignment of the MTSF priorities with the budget function groups.

Dr Dumisani Jantjies, Deputy Director: Finance, PBO, presented the 2020 tax revenue performance. The impact of the pandemic is shown by the significant contraction in revenue collection across all tax instruments in the past 5 months. The 2020/21 tax revenue collection of R238 billion decreased by 18% from the previous year, and is 21% lower than the Budget Review estimation. All tax revenue resources will be negatively affected by the COVID-19 economic conditions and the base erosion due to digitalisation of businesses and profit shifting.

He highlighted tax revenue and expenditure developments. Government provides tax incentives to support economic recovery and is monitoring to ensure that small micro and medium enterprises (SMMEs) and the informal sector can access and benefit from the incentives. Government is also looking into tax reforms for the digital economy, as the digitalisation of economies has resulted in a loss of government tax revenues globally. South Africa currently taxes consumption not income of digital economic activities. It is engaging with the African Tax Administration Forum (ATAF) on the progress of African economies in taxing the digital economy.

Dr Orlandi presented government’s progress in implementing the budget. There has been slow spending in departments, especially in Basic Education, Military Veterans and Human settlements that have, spent 16.7%, 19.4% and 21.3% of the budget respectively. The slowest spending has been on capital assets, especially with the Department of Water and Sanitation. Among other reasons, it can be attributed to the impact of the pandemic and national lockdown making spending on capital assets difficult.  She elaborated on the provisional allocations of the budget implementation and vote reforms in the budget. One of the reforms and interventions the PBO welcomes is the requirement for departments that have transfers above 50% of its total vote, to disclose the functions performed by the department with the remaining budget. These departments must also explain its roles to public institutions.

Dr Jantjies presented an update on provincial and local government spending. The slowest spending in provinces has been on capital assets which could also be linked to the lockdown making it harder to implement. Compared to previous years, provinces have shown slower spending in the first 5 months, a pattern consistent with the impact of the lockdown. The exception is KwaZulu-Natal which has shown faster spending compared to the previous year. The revenue collection of municipalities and metros has declined. He highlighted the audit outcomes of local municipalities, which showed an overall regress for 2018/19 compared to 2017/18. Even so, 8% of municipalities received a clean audit, which is an improvement from 7% in the previous year. Irregular expenditure increased to R32.1 billion, and the quality of financial statements regressed from 52% to 48% in 2018/19.

Discussion
The Committee expressed its satisfaction with the presentation and no questions were asked.

Closing remarks
The Chairperson, in closing, thanked the presenters and everyone in attendance

The meeting was adjourned.