2020 Budget (Expenditure and Division of Revenue): FFC briefing

Meeting report

Prof Daniel Plaatjies, Chairperson: Financial and Fiscal Commission (FFC), briefed the Committee on the fiscal framework and revenue proposals.

He said there had been a contraction in the primary, secondary and tertiary sectors of the economy as well as a contraction in fixed asset formation. This had been allied with governance failures and financial and delivery crises in key state-owned enterprises (SOEs) which had resulted in revenue shortfalls and expenditure pressures, mounting deficits, debt, and debt service costs, and an urgent need to consolidate as well as guard gains. The Budget planned to consolidate the fiscus by slowing down expenditure growth to arrest the deficit and debt, and to keep taxes stable and improve the South African Revenue Service’s (SARS’s) efficiency. It sought to grow the economy through structural change and through developing a capable state providing policy certainty and implementation

The FFC’s response on the consolidation was that cutting the deficit had to start urgently and the pace had to be realistic. It questioned whether the wage moderation was credible, realistic, and fair. Was there not a fairer way to distribute the burden of consolidation? Did it have to fall on to on teachers, nurses, soldiers and prosecutors only?

The FFC felt that a more moderate structural change and growth strategy was needed, focused on big drivers such as climate change, rapid technological change and population shift. On the capable and efficient state, it said there was a need to look at factors behind policy uncertainty and weak implementation, because policy uncertainty was rooted in conflict of interest and inequality. There was a need for conflict management and negotiation to reach shared solutions, and it provided a number of examples of gridlock in government policy.

Mr John Kruger, Head of Research, then moved on to discuss the Division of Revenue (DOR).

He said there had been an increase in the allocation for national departments, but this was mainly due to funds for the ESKOM and SAA SOEs. In the following year, there would be cuts of R24.9 billion. At the provincial and local government level, the cuts would mostly be made to conditional grants.

He then addressed real fund trends in the Division of Revenue and the technical and other provincial grant adjustments, as well as the adjustments to the local government grants, as well as their expenditure performance. Turning to the appropriation proposals, he referred to the baseline adjustments and the spending by functional classification. He said there was a shift from the ‘social sector’ to a focus on economic development, community development and social development, and that defence, state security, home affairs, public administration and fiscal affairs would see reductions in their budgets. Debt service costs were the fastest growing item, and towards end of the 2020 medium term expenditure framework (MTEF) they would be larger than the community development and health budgets.

He referred to the protected votes – Cooperative Government and Traditional Affairs (COGTA), Social Development, Small Business Development and the National School of Government --  and those votes that were under pressure: Stats SA, Agriculture, Land Reform and Rural Development, Human Settlements, and Trade and Industry. Compensation of employment (CoE) accounted for one third of the consolidated spend, and transfers and subsidies for one third also. The average percentage change per year for CoE was (-1.2%), for interest it was 6.7% and for transfers and subsidies it was 1.1%.

Discussion
Mr Z Mlenzana (ANC) asked if it was correct to say that these reductions were possibly based on expenditure trends. Did the Budget align with the State of the Nation Address (SONA)? How was the general cash flow of South Africa? How did South Africa compare in terms of its rate of borrowing and the pace at which it was spending? Was money circulating in the economy? Could the FFC compare this budget’s implications with the GEAR budget?

Mr D Josephs (DA) said the education budget had been adjusted downward, yet it was one of the four priorities of government. He welcomed the investment into early childhood development (ECD). He wanted clarity on the cut to the electrification programmes of local government and what support there was for infrastructure. What was the budget for the severance packages, how many people were earmarked to leave through this, and what were the estimated savings? He asked if the severance packages were offered so that staff numbers could be reduced, and should it not be revisited? The Department of Human Settlements was struggling to monitor who the beneficiaries for houses were -- there should be a national system, because people who received houses were renting them out or selling them and putting their name back on the housing list, which was against the objective of the housing programme. What could the FFC suggest to solve the housing problem?

Mr X Qayiso (ANC) said there appeared to be a downward trend regarding SOEs, so did the FFC anticipate bailouts for other SOEs? On the decrease in the wage bill and the public sector bargaining council agreements, he asked what the anticipated developments around this were. He asked if the Budget talked to the resolutions of the Cabinet lekgotla. He asked what the risks of policy uncertainty were that would influence the Budget.

Mr A Sarupen (DA) asked, in the context of the planned decrease in government staff numbers, if the FFC had identified programmes that had been funded but were not operational. Should the government support vertical or horizontal industrial policy? He asked if managers earning R1m or more was a good place to start cutting down on ‘admin bloat’. Would the budget cuts hamper or strangle local government? He said the cuts to education were a concern, as this was borrowing against the future of the country.

Ms N Ntlangwini (EFF) said the FFC made good research and recommendations, but they just gathered dust. She questioned how the Committee could work with the information. What would be the impact of local government getting the smallest allocation compared to national and provinces? What motivated this smaller allocation -- was it that local government could not handle its finances?

Ms D Peters (ANC) raised concern that the budget for the allocation of housing units by the Department of Human Settlements (DHS) did not match the needs which seemed to have grown exponentially. There appeared to be many problems in the DHS, as there were people who were fraudulently receiving homes, with some having many houses. Human Settlements policy did not account for the influx of people into urban areas and did not look at housing in rural areas. There had to be something the FFC could recommend regarding those people who were constantly moving between rural and urban areas. Did one count them as urban or rural persons? She asked what the view of the FFC was on what the impact of the budget adjustment would be on service delivery in the provinces, commenting that the Northern Cape was the most expensive for service delivery costs. Was early childhood development not part of the mandate of the Department of Basic Education? She said the country was running the risk of having two major expenditure items -- debt service costs and wage costs -- and of having no money for programmes. She asked if tourism and agriculture, key job creating sectors, were adequately funded. The FFC had recommended the devolution of transport services to municipalities -- should it be done piecemeal? Was the FFC’s recommendation founded on the request of municipalities, or based on a national perspective?

Ms R Komane (EFF) said there was a need for clarity as to what the mandate of the Committee was. She was also under the impression that early childhood development had been moved to the Department of Basic Education, whose budget had decreased. The challenges in the DHS had not been addressed. On the severance packages, she said the people opting to leave were those at the professional level. Were there still reserves, and what was the plan going forward? She asked if municipal cuts were not disadvantageous to the municipalities.

The Chairperson said he had spoken to the Northern Cape Member of the Executive Committee (MEC) for Finance, who had said that R13 bn of the R40 bn budget went to CoE. He wanted to know more about the division of revenue formula to provinces. He asked if it was known what the impact of court decisions such as everybody having the right to schools and hospitals etc, were. He said Economic Development was among the smallest allocations -- what were the FFC’s comments on this? Was government getting value for money from its investment into the National School of Government? He said project and contract management skills were deficient, so what skills were being provided? All departments and state-owned companies (SOCs) had legal departments, but the legal bills of government were responsible for the development of law firms’ Sandton office buildings. He said the legal departments either had to shut down, or they should do their work.

In the context of savings, he asked if there were economic models indicating what having Parliament in Cape Town was costing government. Would the FFC consider doing some modelling on this matter? How much did economic exclusion of the majority of the country contribute to the slow economic growth of the country? He added another question to Ms Ntlangwini’s question on how the Committee could work with the information given by the FFC, and asked whether the information received was ever considered. Did the Committee have mechanisms to check whether the information was considered? What was wrong with the country’s economy?

FFC’s response

Mr Plaatjies replied that the Committee had oversight over the appropriation and performance of each sector and department, as articulated by the SONA and the budget speech of the Minister of Finance, and made recommendations on the Budget. This required a high degree of political acumen and steadfastness. The FFC advised on the macro budget and on strategic sectors, and this indicated how the Committee interacted with the FFC’s recommendations. It was incumbent on the two Houses of Parliament to respond to them, because the FFC served Parliament and the Committee had the authority to make amendments. The issue was how it was managed inside Parliament. The FFC reported to Parliament. If the Committee identified different sectors or departments or budget votes it wanted to engage with, then it needed to ask the FFC to advise the Committee in the presence of the Department. In the past, the FFC had made comments on tourism, and the Minister of that department had not liked it. There had been similar reactions from other departments.

On the movement of Parliament from Cape Town and the role of provinces, he said the Committee needed to consider the cost. It would bring back issues nobody wanted to deal with properly. There had been two and a half audits done by successive ministers on the role of the provinces, but that matter had been put on the shelf, and similarly proposals for the movement of Parliament. If the Committee wanted the FFC to do such a cost audit, the FFC could do it, if asked.

The matter of legal services within government needed to be aired with the Department of Justice and Constitutional Development. The best would be to approach the Department, which needed to inform the Committee why legal services could not be rationalised. The Chief Legal Advisor could source legal services, as there were lots of networks for legal services. He said South Africa had a ‘contracted’ state, and the market determined what outputs would be obtained, and as a consequence this also raised issues of the ‘captured’ state.

There had been attempts to re-organise the School of Government to work on the Malaysian, Singaporean or French models, but there had been a revolt from inside the administration. The school was also outsourcing from individual consultants. There was a need to have a conversation on the school, as it had also got caught up in the Department of Public Service and Administration (DPSA) and the policy outlook on public servants.

On the impact of court decisions, he said the reading of the documents did not suggest an effect on school and hospitals. He asked for permission to go back and see how this question could be responded to. He said a classic case had been the decision of the court in the matter between the South African Social Security Agency (SASSA) and Cash Paymaster Services (CPS), where the court had ruled that any agency delivering services on behalf of the state became part of the state, and the decision to go the route of the Post Office as the new agency for payments meant that an opportunity to take over CPS had been missed

On whether the provincial equitable share was equitable, he said the FFC had different views. His view was that the equitable share allocation was actually a conditional grant which limited decision making at the provincial level. It was open for discussion whether it was equitable.

On the shift of the early childhood development programme to the Department of Basic Education, he said certain departments were established by legislation, while others were by proclamation. The FFC thought the reason why was not moving as it should, was that it needed a proclamation by the President. This was a case where policy uncertainty and implementation uncertainty lay inside the administration.

On whether tourism and agriculture were adequately funded, he said that all departments would say they were not adequately funded, so it was best to check with each department on what was costed and what was funded.
 
The FFC’s view on the DOR was questioning whether there was a need for all of the municipalities, given how far people lived from each other. Was there a need for the Free State as a province, or for the Gauteng provincial administration? These matters needed to be looked at in terms of how the state was organised to be responsive to the needs of the people. Therefore, the FFC had raised the issue of regional economies and networks. There were a large number of municipalities that were highly indebted. The FFC had looked at what the role of municipalities should be, given the emphasis on the district model for the rollout of services.

On the reduction of SOEs, he said there were more than 700 SOEs. The FFC could not give a policy decision, but there was a need for rationalisation, especially those SOEs at the provincial government level.

Considering the bailout of SOEs could be done by the FFC only if the Committee facilitated this for the FFC. Treasury looked at the guidelines for government bailouts. The FFC had written to them, but still awaited a reply. Treasury claimed the guidelines were an internal document. If the Committee wanted the FFC to look into the matter of SOEs, it needed to get the guideline document from Treasury. The FFC did not want to get entangled in the matter.

On the economic policy perspective of the country, he said there had been the reconstruction and development programme (RDP) and Growth, Employment and Redistribution (GEAR) policies, and the consequences of GEAR were being felt. This was no different from the early years of GEAR. The contested question was the degree of expansion of social protection services. He asked the Committee to give them two weeks to write up where the FFC stood on the question.

Regarding the SONA injunctions, there had been heated debate in the FFC on whether the Minister had responded to all that the President had said. The FFC would provide a list that it had drawn up on what exactly the President said. 

Mr Kruger said the Money Bills Act stated that the Committee could amend the DOR. The Committee could, for example, say that it did not like the amount of money going to national SOEs, and that it should go to the provinces. On whether any programmes were cut, he said the reality was that they multiplied and it was seldom that programmes were cut.

On the Executive’s decision to shift ECD from Social Services to Basic Education, he said there was a law that said it was the job of Social Development in terms of the Children’s Act. Proclamations might be difficult, because there were other aspects of the Children’s Act that needed to be taken into account.

On whether the budget would end up being only debt and wages, and nothing for goods and services, he said that debt service costs had to be controlled, but the wage costs had not been growing explosively so such a view was a bit of alarmist rhetoric.

On the high pay of executives, he said South Africa had an unequal society and one had to pay professionals more to attract them.  

On municipalities getting the lowest allocation, Mr Kruger said municipalities had other legal sources for receiving income, like property taxes. Municipalities had more mechanisms for receiving income than provinces. Municipal funding had increased in real terms by two percent. What had been cut were the conditional grants.

Prof Trevor Fowler, Commissioner, FFC, said he had worked in the past with the South African Local Government Association (SALGA) and had been to municipalities around the world, and few countries had the power that municipalities in South Africa had. The equitable share was a big share for small municipalities, but was a small share for metro municipalities.

On the management of the movement of people to urban areas, and on getting RDP houses in rural areas, he said it was something that was changing. It had been more pronounced in the early 90s as a phenomenon, but nowadays people came and stayed in the urban areas. There was a need for government to track this, but it would be difficult because national and the provinces were on the basic accounting system (BAS) and the Personnel Administration System (PERSAL), while municipalities were on a different system, and this must be addressed.

Regarding the economy and skills development, he said there had been a slowdown in money given to technical and vocational education and training (TVET) colleges. A study had shown there were many more people at university than at TVET colleges. At Medupi, for example, there was still a dearth of welders, and they had to be imported. This needed to be addressed in vocational training.

In the budget book there was reference to SARS restructuring, but in effect there was no attempt to identify and quantify the gains to be made from the restructuring, so people could not be held accountable for it.

Prof Lourens Erasmus, Commissioner, FFC, said there was a huge case to be made regarding the improvement in the country’s fiscal situation. On Ms Peters’ statement that public expenditure be made more efficient, he said there was a need to look at misconduct and eradicate it. Treasury’s efforts, through the publication of the frameworks for irregular expenditure and disciplinary procedures to be followed, were important. What had to be monitored was the amendment to the Public Audit Act, where the AG could refer material irregular expenditure for investigation, or certificates of debt could be issued to accounting officers should remedial action not be taken.

Dr Mkhululi Ncube, Programme Manager: Local Government, FFC, responded on the question of expenditure trends, as well as budget reductions.  He said that one could see that the expenditure performance of most departments was at 99% to 100%, but that there was under-spending in grants such as the Integrated National Electrification Programme (INEP) grant to Eskom, which was at 60% spending, and that grant would be cut by R1.2 bn. On the other hand there were cuts to the Health Facility Revitalization Grant because of under-spending, but here the under-spending was not necessarily because of negligence, but because of capacity constraints. Treasury needed to look at past performance when making cuts.

The FFC had made recommendations previously on the devolution of transport functions to municipalities, where it had said it had to go to the lowest competent level of government, and that it be piloted in Ekurhuleni and Cape Town, but progress to implement this had been very slow.

Ms Sasha Peters, Manager: National Budget Analysis, FFC, referred to the prioritisation of education, and said education still received the lion’s share, at 20%, of the Budget. She said the slight reduction over the next three years was as a result of a general bid to reduce and reprioritise.

A cause for concern was that government was banking on a reduction in the wage bill by R1.3 bn, and if this did not happen then pressure would fall on the provincial departments of education. The Education Infrastructure Grant would be cut by R1.9 bn, grant but this grant had performed better than the Accelerated Schools Infrastructure Delivery Initiative (ASIDI) grant.

On post school education and training, the reductions were mainly to TVET colleges, which threatened the production of skills that impacted on the economy and on growth. TVET colleges had historically been under-funded, and this was set to continue.

On whether the focus should be on horizontal or vertical industrial development, Prof Plaatjies said that the FFC had not worked through that. The PFMA provided that the FFC could be approached to do such a study.

On whether the budget was linked to the Cabinet lekgotla, the FFC did not know, and relied only on what the President had said.

He said there was a threat on the horizon in the form of the wage issue. In 2009/10, when Ms Geraldine Fraser-Moloketi was Minister, there had been protracted wage engagements with unions.

Mr Mlenzana said his question on cash flow could be included in the written answers the FFC would provide.

The Chairperson said the notes would be given in two-weeks’ time, to add to the input at the meeting.
He thanked the FFC for their input, and they were excused from the meeting.

Wrapping up the meeting, he referred to the Committee’s oversight visit to Eskom, where many issues had arisen, one of which was a contractor that had been overpaid. The Committee wanted all the details and what follow up actions had been taken, so that there could be closure on the matter.

The meeting was adjourned.