Division of Revenue Amendment Bill: National Treasury, FFC and PBO briefing

Meeting report

2022 Division of Revenue Amendment Bill
Ms Wendy Fanoe, Chief Director: Intergovernmental Policy and Planning, National Treasury (NT), took the Committee through the changes to the 2022 Division of Revenue Amendment Bill (DoRAB)  and the 2023 Division of Revenue in the medium term budget policy statement (MTBPS).

She said most important changes made for provinces and municipalities were related to unforeseeable and unavoidable expenditure. The focus of the (DoRAB) was on Column A of the Division of Revenue Act (DoRA).

Changes to Provincial Government allocations 2022/23

Disaster response funding

NT said disasters were funded either through the four existing immediate disaster response grants or reprioritising existing response grants. A long-term approach occurred through rehabilitation costs funded through an adjustments budget, or the medium term expenditure framework (MTEF).

Ms Fanoe said that as disasters happened, funds were allocated to the province or municipality concerned based on the applications received. Applications were received from the National Disaster Management Centre (NDMC) and the Department of Human Settlements (DHS).

In instances of over and under-prescription, funds were shifted between disaster grants in August 2022. This involved moving funds from the Provincial Disaster Response Grant to the Municipal Disaster Response Grant, and from the Municipal Emergency Housing Grant to the Provincial Emergency Housing Grant.

The R1 billion from the Immediate Response Grant had been exhausted. Funds were added to the Provincial Disaster Response Grant and the Provincial Emergency Housing Grant during the adjustment budget process. This was to provide easily accessible funds to these grants in instances of disasters in the remaining months of the financial year.

Additional funding for disaster reconstruction and rehabilitation had added funds to the Education Infrastructure Grant and roads maintenance. This was in response to damage in the affected provinces during the December 2021 and April 2022 floods. R49 million was allocated towards displaced people in KwaZulu-Natal (KZN) shelters.

Additions to provincial allocations

The Department of Defence, Department of Public Works and Infrastructure, and Department of Transport established the rural bridges programme. A total of R389 million was added to the Provincial Roads Maintenance Grant to construct bridges in the Eastern Cape and Limpopo. The 2023 MTEF planned to include more funding for other provinces, which would be erected by the Department of Defence.

Changes to local government allocations in 2022/23

Mr Letsepa Pakkies, Director: Local Government Fiscal Framework, NT, spoke on disaster response funding. He said that R248 million had been added to the Municipal Disaster Response Grant to accommodate for disasters during the remaining months of the financial year. R3.3 billion had been added to the grant for the Eastern Cape, KwaZulu-Natal and Western Cape. R92 million was added to the Informal Settlements Upgrading Partnership Grant to assist the City of Ethekwini in purchasing land for affected flood households.

On rollovers, R1 million had been rolled over in the Integrated National Electrification Programme Grant. R15 million was rolled over in the indirect Regional Bulk Infrastructure Grant.

On reprioritisations, R100 million of the Neighbourhood Development Partnership Grant was shifted towards the indirect grant. This was to assist municipalities in planning and implementing approved projects.

Changes to gazetted frameworks and allocations

Ms Fanoe said the conditional grant frameworks of many grants were identified as needing to be changed to allow for spending on disasters. This included the Provincial Roads Maintenance Grant, the Education Infrastructure and Municipal Disaster Response Grant, and the Informal Settlements Upgrading Partnership Grant: Municipalities.

NT also asked for approval to update the name of an Eastern Cape municipality, which had changed from Engcobo to Dr A B Xuma local municipality.

She said that the KwaZulu-Natal and Western Cape provincial disaster management centres linked all the allocations to the district municipalities. She asked the Committee to make a recommendation to allow the NT to allocate the money to the correct municipality.

Changes in Bill clauses

The DoRA had been amended to allow municipalities to pledge their conditional grants as a form of payment for loans, subject to approval from the Loans Coordinating Committee and the Member of the Executive Council (MEC) of Finance. NT was currently looking at innovative ways to fund provincial infrastructure as well.

2023 Division of Revenue MTBPS

No spending reductions had been made when compared to the previous estimates. Forward allocations for 2023/24 to 2024/25 had remained the same or increased. The national share was noted as having the lowest growth rate. Provinces had a growth of 2.8%, while local government resources had increased by 6%. NT noted an overall increase in provincial and municipal shares over the medium term.

2023 MTEF changes to provincial allocations

On the provincial equitable share, provincial allocations focused on frontline services. R20 billion would be allocated over the MTEF for compensation of employee (CoE) pressures in the education sector.

Substantial funds were also planned to be added over the MTEF to contribute towards the health sector. This included funds for CoE, service backlogs, laboratory services, and other goods and services. Once allocations were made, work would be done with provincial treasuries to ensure monies were allocated to these sectors for the relevant purposes.

On provincial conditional grants, funds were added to the Early Childhood Development Grant, National School Nutrition Programme Grant, Education Infrastructure Grant, and Provincial Roads Maintenance Grant.

On the Budget Facility for Infrastructure (BFI), NT had added funds to the Comprehensive Agricultural Support Programme Grant, Education Infrastructure Grant and Provincial Roads Maintenance Grant. R1.8 billion was allocated in specific funding to assist the Coega Development Corporation in upgrading infrastructure and attracting business. It was yet to be decided how the funding flow would work.

Ms Fanoe said rescheduling had been done within the National Health Insurance (NHI) indirect grant. She said additions would be reflected only in the outer two years.

Changes to local government allocations

Mr Pakkies said that additional allocations were made to the Local Government Equitable Share and Municipal Disaster Recovery Grant. On reprioritisations, funds from the Public Transport Network Grant were put into the rollout of the single integrated ticketing system and the implementation of the MyCiTi public transport network.

On new allocations through direct conditional grants, he said that five municipalities had taken advantage of the budget facility for infrastructure and made a compelling case for resources, including private sector resources and expertise. This was to assist them with projects in alignment with the budget facility for infrastructure (BFI) criteria. A total of R6.5 billion had been allocated to these municipalities over the MTEF.

FFC submission on 2022 MTBPS

Dr Nombeko Mbava, Chairperson, Financial and Fiscal Commission (FFC), presented the Commission's recommendations to the Committee.

Mr Chen Tseng, Head of Research, FFC, said that the Commission had undertaken an approach of real mapping of budgeting alignment and allocations. He explained that "Operation Zoom" technology allowed it to see local government transfers in particular areas. This could go as in-depth as showing areas, street names and available water infrastructure.
 
The FFC was determined to see which municipalities were most challenged regarding their capabilities to spend and capacity to fulfil mandates in terms of service delivery to communities.

2022 Division of Revenue Bill – Provinces

Ms Shafeeqa Davids, Specialist: Division of Revenue, Local Government, FFC, took the Committee through the changes to provincial and local government as set out by the DoRAB.

Over the 2023 MTEF, provincial governments would receive a total allocation of R1.7 trillion. A decrease of 0.03% was projected between the 2022/23 and 2022/24 budget. However, it was predicted to increase in the outer years of the 2023 MTEF.

Provincial and conditional grant rates were set to increase by 2.5% and 4.3% respectively. This would have an overall negative impact on the provincial envelope. The FFC reiterated the recommendations made in the 2021 MTBPS submission.

The FFC recommended that comprehensive reports should be compiled by affected government departments, and should reflect how service delivery would likely be affected and how tighter budgets planned to be managed.

Ms Davids said the Commission had noted that additional funding had been allocated to key basic infrastructure via the Education Infrastructure Grant and Road Maintenance Grant. While the FFC supported the additional funding, it felt that there was a need to develop and update climate change and adaptation strategies. This was especially relevant for provinces prone to natural disasters.

She commented that the Northern Cape, Eastern Cape and Free State received higher per capita provincial transfers, whereas more developed urban provinces, including Gauteng and the Western Cape, were getting lower per capita transfers.

2022 Division of Revenue Amendment Bill – Local government

Ms Davids said that local governments faced numerous challenges which the pandemic had exacerbated. Research indicated eight core reasons municipalities found themselves in their current predicaments. The findings cut across multiple municipalities, despite differences in the operating environment and its demands.

Recently there has been an increased focus on improving the response to challenges experienced by local government. This would be done through key policy recommendations on strengthening municipal finance and governance. This included the approval of the Municipal Powers and Functions Amendment Bill.

The Commission welcomed the review of the conditional grant system concerning the rollout of infrastructure building capacity and providing operational support.

The real growth trend in the Local Government Equitable Share (LGES) was set to increase over the MTEF, from R87.3 billion to R109 billion during the outer years. This represented a marginal annual real growth of 3%.

Ms Davids said the FFC was concerned that the sufficiency of the allocation may negatively impact the small and more rural municipalities. This was because many of the cost drivers impacting service delivery were increasing more than inflation.

Local government conditional grants amounted to a total of R167.8 billion over the MTEF period. Conditional grants grew by 10% in 2022 in real terms. However, negative trends were predicted over the MTEF, with real growth occurring in the outer two years. The FFC welcomed the increase in 2022, given that many local conditional grants were infrastructure-related.

The Commission noted the shifting of disaster funding, and supported the grants' immediate disaster response. However, it cautioned that the process did not remove the challenges, because conditional grants for disaster were still ex-post.

The FFC also noted the shifting of funds from the Neighbourhood Development Partnership Grant's direct to indirect component. It recommended that municipalities use indirect grants as a last resort to increase building capacity.

Ms Davids said urban areas such as the Western Cape, which had stronger municipalities, were receiving a lower per capita allocation. This province's municipalities receiving higher per capita transfers were situated in the central and West Coast districts. Meanwhile, the opposite could be observed in areas such as the Northern Cape.

(Please see attached document for a more detailed account of recommendations)

Fiscal Risk

Ms Gianni Donne, Researcher, FFC, addressed the issue of debt management, and said that the 2022 MTBPS projected a surplus in 2023/24, with debt to gross domestic product (GDP) stabilising at 71.4% of the GDP in the same year. The FFC recommended larger primary surpluses to improve the growth differential dynamics.

On contingent liabilities, the FFC said this posed a significant risk to the fiscus due to reliance of a large number of state-owned companies (SOCs) on government guarantees. Eskom was noted as the largest long-term risk to the economy, constituting 78% of all government guarantees. The downward trajectory of contingent liabilities and government guarantees as a proportion of GDP would be very difficult to attain with the weaker prospects over the MTEF.

On inflation and monetary policy tightening, South African inflation reached a 13-year high of 7.8% in June. This increased the cost of living and dampened the prospects of a quick economic recovery post-COVID. To keep inflation expectations anchored, the South African Reserve Bank (SARB) embarked on tightening monetary policy. This pushed up market lending rates, increased the cost of borrowing, and slowed down consumer demand and growth.

Public sector wage bill

Compensation of employees remained one of the most significant expenditure items, at 31.4% of government revenue in 2022/23. The decrease from 2019/20 was too insignificant to decrease the quantum of the wage bill required to ensure a budget balance surplus.

Two key cost drivers included in the Bill were the increase in the number of public sector employees and increases in salaries. The FFC was of the view that increasing the capacity in the various public services should be done within available budgets to avoid additional spending pressures on the wage bill. It noted that the Wage Bill was driven by employees' salaries, rather than the number of public sector employees.

Recommendations

On fiscal risk, the FFC recommended that careful attention be given to the budget and debt financing strategy to slow down the growth rate of debt servicing costs. Furthermore, it recommended that weak productivity and expenditure be addressed to create job enhancing possibilities.

On the wage bill, it reiterated that government should address its unsustainable nature and improve public sector productivity at a lower cost. 

Dr Mbava concluded the presentation by saying the Commission encouraged mayors and provincial MECs to look at the maps provided to examine the local contexts of economic development to make substantial changes in the long term.

PBO 2022 DoRA presentation

Dr Dumisani Jantjies, Director, Parliamentary Budget Office (PBO), said that their presentation focused on DoRA in the medium term. The decision to increase allocations in the provincial and local spheres was yet to come to fruition. The PBO's analysis indicated that, in real terms, it would decrease, specifically noting the per capita decline in health and education expenditure.

Division of Revenue and Equitable Shares

Dr Nelia Orlandi, Deputy Director: Finance, PBO, explained the division of responsibilities across the different spheres of government according to the Division of Revenue. Government continued to increase the proportion of total government spending to provincial and local spheres of government. However, these intentions have not been realised in recent years.

On changes to the provincial equitable share, the PBO predicted a decline in spending over the medium term, noting a slight increase in nominal growth over the 2023 MTEF. The only current adjustment referred to the KZN Department of Social Development, to assist flood victims in 2022/23.

Division of Revenue in context

Ms Busi Sibeko, Financial Analyst, PBO, said that real per capita spending by function group declined in the MTEF, focusing specifically on non-interest expenditure. This was despite education and health being declared high priority areas.

On health, South Africa’s life expectancy has increased over time. The PBO noted that primary health care was deteriorating, which was a serious healthcare concern, particularly in areas which were important indicators for health, such as the increasing infant mortality rate, malnutrition and the under-five mortality rate.

The decline in investment in the healthcare system resulted in it being overstretched and underfunded. This would have long-term ramifications in terms of the cost of taking care of the population, which could ultimately have been prevented. The Minister of Health had noted the concerns surrounding vacancies in state hospital staff due to budget cuts.

On education, she highlighted the link between the increased cost of living and the dropout rates of students. These numbers were particularly worrisome, given the high unemployment rates in the country. This was seen as likely to increase if no changes were made to the socio-economic underpinnings leading to dropouts. However, education trends continued to decline. In real per capita terms, government would be spending less on students in 2024/25 than it did in 2016/2017.

On disaster spending and allocations, the PBO acknowledged the R1 billion allocation given for response and relief to KZN and the Eastern Cape. It referred to the further allocations requested by these provinces towards reconstruction and rehabilitation, despite reports earlier in the year of the under-spending of these grants. The Auditor-General's (AG's) report reflected that this had been too slow and inadequate. The PBO felt concerned about the rate at which that money had been spent responding to emergencies. This included elements such as provisioning mobile classrooms, kitchens, provisioning temporary residential units, water tank services, repairs to properties and social relief efforts.

Ms Sibeko said that only social relief efforts had performed well. Other areas had experienced rollout delays or targets were not met. It was important for South Africa to invest in creating a proper disaster management plan. This required government to take a proactive rather than a reactive approach.

The PBO recommended that research be done into how to invest in appropriate infrastructure and disaster management capable of handling the frequent, extreme weather events. It said that backlogs would be addressed through the fiscus.

Social Relief of Distress Grant

Dr Seeraj Mohamed, Deputy Director: Economics, PBO, said that the 2022 budget allocation for the Social Relief for Distress (SRD) Grant was insufficient to accommodate the large number of beneficiaries.

The Department of Social Development (DSD) introduced additional qualifying criteria for the grant so that the Department could remain within the budget allocation. The DSD amendments included a R624 means test. Despite these amendments, the Department was likely to underspend.

The failure to address unemployment or have sufficient social provisions resulted in long-term cumulative negative impacts on households. The majority of South Africans lived in poverty. These conditions would be exacerbated by the cost of living crisis, placing more people in poverty. Due to unspent funds, R5.5 million billion had been shifted away from the DSD. The PBO questioned whether there were better alternatives to the extension of the SRD grant until 2024.

Discussion

The Chairperson said she was concerned about the slow process when responding to disasters. She asked what the reasonable turnaround time was to respond when disasters had occurred. She also asked whether there was a way to improve these responses, as it mostly affected the lives of the poor in those areas.

She welcomed the PBO's comments, and said the reactions of government during disasters were of great importance. Disasters were to be expected during the rainy season, especially in KZN and Mpumalanga. She encouraged a more proactive approach to deal with these disasters.

On local government, she asked how they had taken into account their mandate and functions as articulated in the White Paper and Constitution, adding that these concerns were directed towards all the presenters in the meeting.

She asked for input on concerns regarding the expenditure on conditional grants at the provincial and local levels. What steps were being taken to address this? The extent of the situation was unacceptable.

On transport, the Chairperson asked to what extent NT and municipalities engaged with the municipality of Cape Town and the taxi industry concerning the MyCiti bus system. She noted that some routes had been shut down after expensive infrastructure had been built. This infrastructure had remained unused, which she felt constituted fruitless expenditure.

She asked the FFC and PBO what their view was on the current state of wage negotiations. She acknowledged that the Minister of Police had brought up issues of shortages of staff. She was of the opinion that negotiations should occur before an amount of money could be proposed.

Mr D Ryder (DA, Gauteng) appreciated NT's presentation as an excellent Division of Revenue adjustment. He also appreciated the information provided by the FFC and PBO.

He asked if further clarification could be provided on the R1 billion allocation to KZN, as this differed from the views of people on the ground and the media. Was the rollover in Mfuleni a rollover of unspent funds during the previous financial year, or was it coming from elsewhere?

The Chairperson appreciated the question on KZN, as the National Council of Provinces (NCOP) was headed there the following week. The clarification would allow the Committee to perform their work better.

Mr E Njadu (ANC, Western Cape) welcomed the presentations for their clarity on several matters. It was encouraging to see the inter-governmental shifts, as it would ensure funds were available during instances of disasters. He emphasised that when disasters occurred, the turnaround time in municipalities needed to be quick. He asked NT how quickly funds were available to assist communities affected by disasters.

He asked the FFC and PBO what the impact was of the current interest rate and inflation on the much-needed economic growth. How could the effectiveness of the disaster grant be improved? Were there specific steps that government could implement to achieve this?

Mr Du Toit said that more funds were available due to the tax windfall. He acknowledged that every year it was necessary to move funds around. He agreed with the Chairperson's sentiments regarding wage negotiations. It was concerning that more funds were available for areas such as education, but the funds going to this sector were only to cover wages.

He commented on the number of vacant posts in the Department of Health. He felt that the wage bill was of grave concern. Despite the rising cost of living, the SRD grant was currently at R350, and he anticipated that poverty rates and government's responsibility would rise. He asked for how long the SRD grant would remain feasible, and whether a basic income grant should be considered.

Mr M Moletsane (EFF, Free State) appreciated the FFC's recommendation on local government, which indicated that the Division of Revenue should take into account geographical and rural factors affecting provinces such as Free State. NT must revisit the funding model used for the Division of Revenue, as the Free State was suffering.

He asked NT why the Free State was not included in the Municipal Recovery Grant. He said the Free State had also experienced a disaster in Jagersfontein, and felt this area could also benefit from disaster reconstruction and rehabilitation.

NT's response

Ms Malijeng Ngqaleni, Head: Intergovernmental Relations, NT, spoke about the quickest ways to process the changes in the system. She said that these engagements would be best dealt with by including the National Disaster Management Centre (NDMC), as the disaster response and management was guided by the DoRA. She said the Act provided for immediate responses, which invoked many of the grants.

NT also allowed conditional grants to respond to disasters in an emergency way and provide for rehabilitation. Rehabilitation was described as a process informed by assessments and the needs required. The system was designed to issue immediate response relief and address the long-term impacts of rehabilitation.

She acknowledged issues regarding the speed at which the government could respond to disasters. Using KZN as a case study, the challenges were mainly concerned with how coordinated the government could be in these instances. 

She explained that the applications and processing happened at the NDMC, which later informed the allocations. The NT would not have a complete say in changing these processes. It also expressed concern regarding the speed of spending. However, it felt this was a responsibility of the organs of state responsible for spending, and that these entities should be held to account.

NT believed that the allocations took into account the mandate of local government. Local governments were afforded their powers and functions, which included the powers and functions to raise revenue. Most of the powers and functions performed by local government were able to increase revenue, compared to the provincial and national government.

The LGES allocated by NT was intended to provide for the fiscal gap. It was also intended to provide directly for national policy in terms of free basic services. NT also allocated conditional grants which responded to the needs of how conditional grants were allocated, particularly regarding infrastructure.

She said the key issue of local government was their performance in terms of their ability to manage and optimise revenue, manage the expenditure efficiently and perform their functions as required. It was important that the gaps be addressed before more money could be put into local government for these issues.

Referring to conditional grant monitoring, she said that real performance occurred when organs of state that asked for funding, complied with a readiness to spend. Challenges occurred when planning did not occur to the required extent, which would allow organs of state to spend as efficiently as possible. NT felt the underspending in the provinces was a challenge they could not solve on their own, and it required accountability from the state organs.

Responding to the questions on transport, Ms Nqgaleni said that this matter may fall under the scope of the Department of Transport, as they were overseeing the allocation in terms of the integrated public transport systems.

Ms Fanoe said that the Division of Revenue Bill allocated four conditional grants. The conditional grants were allocated with amounts, without provinces or municipalities in mind at the time. Funds were made available specifically when a disaster happened after the NDMC and the Department of Human Settlements had done assessments. The NT then agrees to provide the funds to the affected areas. After a disaster period of 90 days, it issues a gazette to indicate how the amounts were allocated.

Ms Fanoe clarified that the R1 billion was existing money in the system, which was not allocated to any specific province or municipality. At the beginning of 2022, an allocation of R325.8 million was made to the Provincial Emergency Housing Grant, and R175 million to the Municipal Emergency Housing Grant. The Municipal Disaster Response Grant was allocated R371.4 million, and the Provincial Disaster Response Grant was allocated R145 million. This total figure constituted the R1 billion which was referred to earlier.

On the amount allocated so far, KZN has been allocated R342 million through the Provincial Emergency Housing Grant, and the Eastern Cape has been allocated R70 million through the Municipal Emergency Housing grant. Via the Municipal Disaster Response Grant, KZN had been allocated R407 million, and the Eastern Cape R110 million. Money was yet to be allocated through the Provincial Disaster Response Grant.

She said the money had to be topped up due to depleted funds. The NT had made additional provisions in case further disasters were to happen.

Concerning Jagersfontein, disasters had to be declared at national, provincial or municipal levels, and a disaster assessment must also be done. This assessment would go from the provincial Disaster Management Centre to the NDMC. She offered to follow up on the issue in the area with the NDMC and provide feedback later to the Committee on the status of the application.

Ms Fanoe appreciated the presentation by the FFC, specifically their graphs, as it indicated how redistributive the system was. It indicated how provincial equitable shares were distributed in terms of provinces, especially where urban provinces per capita got much less than what the rural provinces were allocated.

NT was currently reviewing the provincial equitable share formula, seeking to strike the correct balance between rural and urban factors. This was being done in collaboration with the FFC, the provincial treasuries and the relevant national sector departments. A number of reforms have already been introduced in the education and health components. The health sector reforms had the effect of pushing allocations in favour of rural provinces.

Mr Jan Hattingh, Chief Director: Local Government Budget Analysis, NT, said Treasury agreed with the concerns expressed regarding the ability and pace at which spending was occurring. It issued circular 116 on 26 April 2022 to guide what municipalities should do in this specific case.

To assist municipalities in accounting for spending and to ensure transparency, it issued Municipal Standard Chart of Accounts (mSCOA) circular 14 on 16 May 2022. Mr Hattingh said this was available on the NT website, and he could make it available to the Committee.

On the MyCiti issue, he said they had extensively consulted with the City of Cape Town regarding the cash flow issues. As part of the design for this project, there had been active interaction with the taxi industry. At this point in time, however, the Committee would have to ask the Department of Transport or the Portfolio Committee on Finance about the matter.

Mr Pakkies addressed the Mfuleni question, and said that the R15 million had been rolled over from unspent funds during the previous financial year through the indirect grant. It had gone through the national rollover process and there had been proof of commitment. This allowed the funds to be rolled over. In the meeting with the Department, challenges were indicated regarding the appointment of the service providers to carry the work through. Some funding had been recommended to be shifted towards rehabilitation work through the Appropriations Bill.

He said NT acknowledged the failures in the current system. They were reviewing all of the grants in the system from the Committee’s previous recommendations. Issues under review included the number of grants, how they could work efficiently, and the interface between provincial and local government grants and indirect grants. It was hoped that these findings would inform the 2024 budget process.

FFC's response

Mr Tseng attributed the lack of responsiveness to disaster funding to the length of the process. He used the example of water infrastructure, roads and electrical systems which would be affected by floods when considering early warning systems. The White Paper assumed that local government’s fiscal framework was supported by its own economic and revenue-generating powers.

The FFC emphasised the importance of local economic development opportunities and context for local government sustainability and feasibility. The macro-local government framework and inter-governmental fiscal relations (IGFR) transfers were still very reliant on the 90/10 split. Despite the FFC's efforts in terms of budgets and allocations, the numbers remained largely unchanged.

On expenditure, the FFC took the concerns expressed into consideration. Infrastructure maintenance in areas considered various factors, including population, economic activity and the circumstances of the natural environment.

Mr Tseng reiterated that a large portion of the allocations went towards upgrades. This could be best be achieved only through engagement directly with local municipalities and mayors. The FFC had to evaluate whether the investments in these particular areas made sense.

The FFC said that there had been significant and substantial consultation on MyCiti. The Public Transport Operation Grant (PTOG) was being contributed to the province, directly towards Golden Arrow buses. He said the taxi industry had a strong idea of mapping, where their customer bases were, and when these individuals were travelling throughout the day and week. This was the purpose of where funding mechanisms should be associated, and city planning at the local level must be matched, including the MyCiti system.

Mr Tseng said that the size and shape of the wage bill was very big. Any small movement, such as increases and performance incentives, would have a large impact on it. It was quite important that negotiations should normally take place beforehand, but budgeting also played an important role as a signal during negotiations on the broader labour relations dynamics.

The FFC urged that inflation and interest rates relative to the needed growth had to be considered in relative terms, such as the inflation rate relative to the growth rate in real terms. This was because inflation was a measure of overactivity in the economy.

He said that there would be stagflation if inflation was too high relative to the economic activity measured by the GDP as real growth. This referred to low growth while prices pushed the cost of living and activities beyond the affordability of the average household in the economy.

On SRD grants, he said that the fiscal framework was not good at spending and implementing the budget despite the available funding. The FFC believed there was a lot of room for reprioritisation and improving the efficiency of implementing the spending of this money.

PBO's response

Mr Jantjies said that economic issues had been worsening, including inequality and unemployment. On the wage bill, he said that the government had to restore the collective bargaining system. He felt that with it functioning poorly, this would just lead to further instability. PBO felt that negotiations should take place first before budgets were pencilled in.

The PBO noted the impact on households of the high inflation rate. As it was not a normal situation, more substantive work would have to be done in response to this challenge.

On the basic income grant (BIG), he said that they were looking for predictability over time with this. The PBO felt this required different questions to be asked. This included whether government could afford not to support households with a form of basic income. He said that the BIG should not only be seen as expenditure. It was rather economic activity that could enhance the economy, greater well-being and increased productivity. This could lead to increases in governmental revenue, and the PBO foresaw it stabilising over time.

Mr Jantjies experienced poor connectivity, resulting in fragmented speech.

Dr Mohamed said that the issue of building household resilience was important, given the various issues discussed in the meeting, such as the Conference of the Parties (COP) 27 and COVID. The PBO also attributed climate change as a factor leading to more intense and frequent weather events.
Improving the disaster response turnaround started with building resilience within households. After World War 2, many European countries did this by increasing social grants and providing healthcare and basic services. This was termed building automatic stabilisers.

In these countries, the impact of COVID and lockdowns had a lower impact in terms of unemployment. These countries experienced a quicker economic bounce back, as people had the resources to spend. In South Africa, the same resilience could not be observed when people were affected by disasters without sufficient social grants for adults. This leads to increased weaknesses, erosion of the social fabric, including increased gender-based violence (GBV) and crime, and socio-political instability. Note should also be taken of events in the short-term, as sudden expensive costs to the economy may have to be borne.

Dr Mohammed encouraged the Committee to think of building household resilience as the first step in disaster relief and management. This was a key issue to keep in mind when considering factors such as the SRD Grant and the BIG. The country could not afford not to implement these measures, given the state of the world and climate change.

Many options for providing ongoing funds have been considered within the fiscal framework. The PBO stressed that wealth and income inequality levels had to be taken seriously. Dr Mohamed referred to a paper comparing inequality between South Africa and Brazil. He said that while Brazil had extreme inequality, South Africa had obscene inequality.

When considering wealth taxes, increased income taxes and increased corporate taxes, it was important to consider the levels of inequality. Great concern was given to the lower and middle class, while the upper class, which owned two thirds of the wealth in the country, were often overlooked.

Effective redistribution was a macro issue which was important to consider when supporting society and building resilience. Dr Mohammed encouraged closer attention be paid to the top 10% and 1% of earners in the country.

Dr Mohamed said interest rates and inflation concerned different views in macroeconomic policy. The PBO had explained a specific view that saw fiscal policy as ineffective, while monetary policy had to do all the heavy lifting. This view felt that government spending would overcrowd the private sector, which could also be inflationary. The PBO felt that this approach was incorrect. This was due to the high unemployment and unused capacity levels, linked to low levels of demand in South Africa. Many economic theories assume high levels of unemployment, which creates a limit when wages and the demand for work increase.

He said that this was not a risk to South Africa on account of the way its economy was structured, with high levels of unemployment and relatively low levels of capacity. The PBO attributed a lot of the inflation to higher fuel and fertiliser prices and to import costs, and increased interest rates were not necessarily the right response.

The Chairperson thanked NT, PBO and the FFC for clarifying issues which would enrich their report to Parliament.

The meeting was adjourned.