Second Special Appropriation Bill: PBO briefing

Meeting report

The Chairperson said the meeting would deal with the responses of the Parliamentary Budget Office (PBO) to the Second Special Appropriation Bill.

Apologies had been received from Ms M Dikgale (ANC), Ms N Hlonyana (EFF), and Mr N Ntlangwini (EFF).

PBO’s response to 2021 Second Appropriation Bill

Dr Dumisani Jantjies, Director, PBO, presented the PBO’s response to the Second Special Appropriations Bill.

Responses were provided on:

• Issues related to the Covid 19 pandemic and related health, social and economic effects.
• The fiscal policy framework and existential risks.
• National expenditure and budget balance.
• Preliminary outcome for 2020/21 of a selection of votes.
• Expenditure as at the end of June 2021, and additional funding proposed for relevant national departments.
• Facts from the 2020 integrated report of the South African Special Risk Insurance Association (SASRIA).
• SASRIA’s integrated report, 2020.
• Social grants.
• Challenges identified with the social relief of distress (SRD) grant.
• Further risks for medium-term budget consideration.

The PBO said it had cautioned repeatedly about the:

• risks faced by South African society that have to be taken into account within the fiscal policy framework, budget allocations and government’s long term budget planning

• fragility of the social fabric due to the worsening quality of life and suffering related to extremely high structural unemployment and extraordinary levels of inequality

• Women, black women in particular and youth are some of those vulnerable and are worse affected in the society and the economy

The ongoing social and service delivery protests across the country leads to real destruction of community infrastructure assets. Even if the July 2021 events were initially orchestrated the outcomes show us the political and economic damage of extreme poverty and the negative costs of extraordinary levels inequality. To regain economic stability and rebuild the economy, government has to also provide households with more stability and assurance in the form of a more comprehensive social security system. The cost of instability at a household level is not only related to macroeconomic stability but also political stability and democracy

The PBO noted the challenges with the Social Relief of Distress (SRD) grant:

• The AG’s findings on the R350 special relief grant indicated the lack of data integration across government

• Grants being paid to individuals who are not distressed: 67 770 grants were paid to individuals who did not qualify. Although this number seems to be small (less than R25m) given the scale of relief being provided, it should be prevented

• SASSA has referred cases of fraud and compliance for investigation:

• About 241 criminal cases have been opened against government employees

• 657 against company directors

The PBO said, in context of the special appropriations, the questions that the MPs should consider are:

 • Whether, this special appropriation bill may have been avoidable if government had reassessed fiscal consolidation stance; and

• Whether reassessment would have allowed government to take into account warnings about the fragile social fabric and the impact of the 3rd wave of Covid-19 infections seriously

The draft Second Special Appropriation Bill, 2021 proposes additional urgent funding allocations of R32.850 billion. This amount includes allocations already authorised in terms of section 16 of the PFMA: For Social Relief of Distress: R10.013 billion • For Trade, Industry and Competition: R1.3 billion

To assist Members with their deliberations and considerations to approve, amend or reject the Second Special Appropriations Bill, the PBO provided additional information on:

• Preliminary outcomes for 2020/21 that shows over-collection on revenue and underspending on appropriations

• First quarter outcomes for 2021/22 shows higher than expected revenue collection and slower spending according to a 25 per cent notional benchmark

The proposed special appropriation is expected to increase the main budget balance if all other amounts are kept the same. Preliminary outcomes for 2020/21 and expenditure in the first quarter of 2021/22 shows underspending in specific votes that submitted a request for an urgent special appropriation. Social Development estimated that approximately 13.2 million people will be eligible to receive the special SRD Covid grant based on: 5 853 661 previous grant recipients, which is in line with the 31 March 2021 SASSA report for 2020/21. It is, however, not clear how the numbers (7 360 011) of caregivers were estimated. Caregivers should be well defined. It would also assist if actual numbers of recipients of a caregiver grant could be provided

(See attached document for details).

Discussion

Mr O Mathafa (ANC) asked if a continued fiscal consolidation would exacerbate the conditions of unemployment, inequality and poverty in the country.

He said the PBO appeared to be advocating a more comprehensive social security system. However, it was evident from the reaction to, and subsequent withdrawal of, the social development Green Paper on comprehensive social security and retirement reform, that the funding arrangements for the envisaged security system might remain a contentious issue for some time. What was the PBO’s position, and how could all stakeholders and role players reach a consensus on the necessity for a comprehensive social security system, and the availability of adequate funding?

The PBO had expressed the need for National Health Insurance (NHI) in the comprehensive social security system. Would the roll out of the NHI be affordable, because the country had experienced unplanned spending pressures induced by the unexpected Covid pandemic, and the unrest in Gauteng and KZN?

The reports stated that there would be allocations to assist small businesses that were affected by the unrest. However, from the experience after the pandemic, the government had tried to assist businesses affected by the pandemic with a R200 billion guaranteed loan scheme which had under-performed dismally. Responses from constituencies also showed that applications from black businesses had been ignored and declined, and the majority of black businesses had not benefited from the scheme. Did government have enough mechanisms in place to ensure that this particular intervention succeeded, and that it had the desired outcome, particularly as it related to assisting small businesses that were affected by the unrest?

Would the PBO suggest conditions that could be attached to the allocation, and how those conditions would assist those businesses that were affected?

Ms D Peters (ANC) asked if there was any aspect of the Special Appropriation Bill that PBO was suggesting for reconsideration or amendment.

What sanctions should government impose against companies which attempted to defraud the system by double-dipping and subrogating financial laws and damages in order to benefit from the allocation of the special allocations?

She asked the PBO to provide the Committee with an analysis of the state of State-Owned Enterprises (SOEs), and if the fiscus would be able to cover any request for anticipated bail-outs. Which SOEs were on the decline, and what should Parliament do to revive these enterprises.

Could the PBO confirm if under-spending was a good thing under the prevailing economic situation? Was over-spending an indication of the pressures that the particular entity or department was experiencing? What was the PBO’s view on the under-spending and overspending?

Mr Z Mlenzana (ANC) asked if the transfers done had been justifiable. What was the impact of the perpetual transfer of budgets from departments that under-spent on the end users?

There were regular reports of the police dying in the line of duty --what was the budget office's advice regarding their tools of trade. Did the police have enough tools of trade?

Was the PBO happy with the contingency result? Had it not been exhausted through this appropriation?

Mr A Sarupen (DA) noted the warning on the possibility of recurring social unrest in South Africa. However, the PBO’s mandate was limited to reviewing the budget and making recommendations around fiscal policies and proposed changes, and did not cover broader economic policy. It was important that economic policy decisions supported fiscal objectives over time. Also, more revenue was needed to cover social security, but the PBO’s presentation lacked information on the proposed economic policy changes that should be made.

What was the PBO’s take on the current macro-economic approach towards stability, and how critical was it in terms of monitoring policy?

Mr X Qayiso (ANC) asked the PBO what its view was on the review of the fiscal policy towards effecting necessary changes to the current economic challenges. Economic challenges were experienced more in the areas of national health and education, which should be boosted. There was need for a radical shift that would accommodate prevailing circumstances, such as the crisis of Covid 19 and other disasters that the country found itself in. A long-term policy plan was also required to accommodate emergency situations.

On over collection of revenue, slow spending and under-spending, he asked if the PBO thought there were issues with the Money Bills and Related Matters Act, and if the Act could be reviewed.

Over 45% of the budget was spent on education, health and social development, but the feedback indicated that this was not enough. What would constitute a sufficient allocation, and what was the spending rate of other countries in this respect.

The PBO’s report stated that SASRIA’s provision of a transfer may not be necessary. The Chairperson asked if this conclusion was because SASRIA had enough resources, or it foresaw fewer claims.

The report also indicated that there was room for a tax increase. What would be the impact of that increase on future economic performance? What steps were under way for the reduction of company income tax which had been introduced during the time of the budget by the Minister of Finance?

PBO's Response

Dr Jantjies said government had signed up for the national development plan (NDP). One of the principles around the plan was embracing the evidence-based policy from the government perspective, where the government was committed not only to propose policies, but also to undertake social impact assessment policies. The PBO proposed to be part of the process and not only propose policies, but deliberate on their implication for society, the economy and the public finances.

The Act required the PBO to provide advisory recommendations on macro-economic and fiscal policy, but did not bar it from commenting on macro-economic policy. It would therefore provide information that would enable and provide support to departments and government stakeholders.

On the fiscal policy framework, PBO tried to provide information on the likely outcome of these policies. There had been lots of discussions around the kind of fiscal policy that would be required in the immediate instance, and over the medium term. In previous presentations, it had considered the economic development challenges of the country, the issue of convergence around what government had to do globally, and the importance of fiscal policy as a very important tool for governments to address socio economic needs, and certainly rebuild the economy.

The PBO was finalising a brief for the Finance Committee around the discussions on the basic income grant (BIG), and it would be circulated to other committees. However, the question remained how satisfied government was with the country’s level of inequality and poverty, and what instruments could be used to deal with some of these issues. In a recent UN discussion, poverty was classified as a human rights issue as opposed to an economic and finance question, and this needed to be deliberated on.

More substantive work needed to be done on state-owned entities. Questions around compensation, particularly with regard to the commercial and developmental mandate, had so far been considered.

Referring to the 45% spent on social spending, he said South Africa was one of the highly unequal societies, and there should be more concerted efforts towards creating more jobs and opportunities. The question of whether 45% was enough should therefore be contextualised.

The economy in its current state excluded the majority of South Africans from participating in the national economy. Economic policy must take that into account and ensure that every sector was included, such as the informal businesses, which were not really accounted for. In previous reports, the PBO had expressed the need to strengthen the human development index.

Over recent months, there had been lots of global discussions on levels of taxes, but South Africa could not be compared to developed countries which relied heavily on income taxes. However, there were global efforts currently in place to deal with the loopholes in the tax system.

There were two aspects to the NHI funding and expenditure -- there was the national health service, and the creation of a national health insurance fund. NHI funding needed to be allocated towards providing a proper health service to citizens. Under-spending on the NHI grant was not acceptable, because the health system should provide quality services. The Department envisaged creating an entity to manage the National Health Insurance fund.

Information from Treasury did not convincingly show that all the proposed appropriations were urgent. For example, with regard to SASRIA, the information available was not enough to decide whether it should be allocated R3.9 billion. The question therefore remained whether these allocations were urgent for approval in a special allocation bill.

The first quarter expenditure was not enough to make a decision on whether the police and defence would need more money, though it was clear that both departments had under-spent in the previous financial year. The adjustment budget process would, however, provide clarity on why those departments had under-spent, and whether that under-spending would be rolled over or given to the Revenue Fund.

In terms of reports on over- and under-spending, the Committee asked the PBO to present a report on the 14 departments with which they had hearings in respect of a decline in their budgets. The report should be submitted soon. However, in some instances in the report, the departments had reduced their budgets but did not make any changes to the targets and outputs for this year -- they were reducing the budget but indicating they would reach the targets. That report would also assist in making a decision on this special appropriation bill.

The contingency reserve had not been appropriated yet, and additional funding would be required for this special appropriation. However, there were provisional allocations from the presidential job creation fund that had not been appropriated. Additional funds of R7million needed to be urgently allocated to care givers.

(At this stage, connectivity was poor and speech basically inaudible).

Dr Seeraj Mohamed, Deputy Director: Economics, PBO, said that the PBO had been questioning the use of the fiscus before the Covid pandemic, and one big question was where growth would come from, particularly with low investment and the recognition that around 60% of gross domestic product (GDP) comes from households. Government had continued to reduce expenditure, with no allocations or grants towards poor households to support them to contribute to that expenditure.

On small business growth, the R400bn grant guarantee for small businesses should not have been a guarantee that went through the private banking system, but should have been a direct injection of money into poorer communities, and a lot of that for households. The best way to maintain and transform businesses was to actually provide those funds to the communities where those small businesses were situated. This process of the economy must therefore be considered not as a fixed part of money and government budgeting, but as a dynamic and growing entity. The issue of shifting away from consolidation was linked to the decline seen in private sector investment, because the levels of extension of credit to the private sector had increased to about 10% of GDP in a few years after the global financial crisis, and had stayed at that level. Even though businesses were borrowing, this money was not being invested. There had evidently been a long period of low and negative private sector fixed capital investment, so where would growth come from?

On fiscal and monetary policy, fiscal policy could not be discussed without looking at the economy. The role of government spending in the economy should be seen as an integral part and as a way of dealing with the particular impacts of the pandemic and the crisis caused by it. Emphasis of this consolidation had forced the National Treasury to look only at the supply side, but this should be accompanied by a review of the state of households and the demand side of the economy. The success of structural reform was seen in the economy growing, and without focusing on the demand side, success would not be achieved.

The PBO had spoken consistently and strongly against monetary policy. There was an increased alignment between fiscal and monetary policy, and increased accommodation for fiscal policy by monetary policy across the world.

Further discussion

Mr Mlenzana said the PBO needed to provide more clarity on the Appropriation Bill and its consequent effect. Was the Bill being implemented the right way, and were there foreseeable changes after this Bill would have been adopted?

Mr Qayiso asked if the restructuring within the defence and police budgets justified the low spending and under-spending.

Did the Committee need to have future discussions on the NHI funding and the issues raised on the state-owned entities?

The Chairperson asked for more details on the changes that had taken place in the country as pronounced by the Ministry of Finance, especially around company income tax, as a means of reducing unemployment, poverty and inequality.

There was a lot of restructuring in the economy, especially involving SOEs, and the main argument had been against some of these SOEs coming to Parliament wanting to be bailed out. What did the PBO think would be the effect of privatisation in the context of tackling poverty and inequality?

Regarding the R3.9 billion for SASRIA, was there a plan for the right distribution of resources in the light of some of the SOEs that were struggling?

Was the problem of the economy a lack of money, or a lack of efficient use of resources, which results in the need to constantly appropriate money and solve economic problems?

PBO's Response

Dr Jantjies referred to the issue of budget efficacy in the light of competing interests, and said there would always be trade-offs. However, the implication of these trade-offs to the economy, society and public funds, should be understood, with a long-term plan to address the economic and social issues. The context mattered, and the prevailing experience of spending patterns must be taken into account during the adjustment budget. There were anticipations of bigger costs, but there was a need for economic impact assessments in some of these areas. A report had been prepared on the budget cut implications for some of the departments, and it would be submitted in the near future.

A report was in progress on SOEs which was linked to the Presidential report. The PBO would provide future reports on this, but acknowledged that there had been failures and wastages.

The Money Bills Act resulted from the constitution, and stated that only the Minister for Finance could propose a money bill. The role of the legislature was to amend those bills or make proposals to amend areas that required more funding. However, Parliament needed to get more useful information to enable it to assess whether the money bills were providing enough information for Parliament to determine if the budget had led to better developments and outcomes.

From governments’ proposal last year, the issues around tax policy did not contextually present a problem. There were probably opportunities for a solidarity tax, as some businesses had not earned income due to Covid 19. There was no evidence that the country had reached the maximum level where taxes could be imposed, but it mattered that the situation was contextualised to see if the taxes were being recycled back into the economy. Looking at the country's budget, there were so many expenditures which the tax commission had commented on, that made the South African effective tax rate below 15% of the actual tax paid by businesses. He believed they were trying to take away some of these expenditures and leverage back to the actual rate. There had been concerted global efforts to deal with the taxes and the loss of tax spaces, particularly from small countries to big countries.

On corporate income tax, globally taxes had shown not to be able to generate enough revenue within the digitalised company activities, so there was a need for more effort and a reform to raise more revenue from the digitalised activities of companies and thereby increase the tax base within the corporate income tax.

Dr Nelia Orlandi, Deputy Director: Public Policy, PBO, said she did not think there were gaps in the Money Bills Act. However, in terms of under-expenditure, the process used to determine the budget needed to be changed, and the Budgetary Review and Recommendations Reports (BRRRs) should also be considered. The BRRR reports provide a holistic picture of what was going on in a department. For the budget office it was not possible to do a BRRR report or a total budget analysis per department. A mini budget analysis was done, which considered the current trends, expenditure trends, current budget, how the budget had changed in previous years' estimates, personnel costs, organisation structures, how many staff they had above the organisations' structure, and key performance information that was linked to the budget. Additional requirements for the BRRR report may be included before the budget was completed, so that the PBO could provide additional information. They may just need to use the tools that were available more effectively in respect of the budget.

On SASRIA, the perception from Treasury showed that it was a buyout. The PBO would interact with SASRA to get more information on this. Consideration was ongoing regarding other institutions that were in need, with questions on whether to make a trade-off. Should it be an immediate buyout of SASRIA, or should consideration be given to other requests that might come up for appropriation adjustments for other entities that also needed support.

(Connectivity was again poor, and speech basically inaudible).

Dr Mohamed said he believed that the issue of privatisation should be considered on a case-by-case basis. Where the services involved development and support, then privatisation could be considered

Regarding tax issues, the reduction in corporate tax in the budget was not symbolic, because lower income was expected from corporate tax in 2020 and 2021. Even if the tax rate was reduced, there would have been no significant benefit from the reduction this year. It should therefore be seen more as a symbolic gesture towards supporting investment and growth.

Dr Jantjies said that a report would be prepared on the restructuring of the defence budget, with comments on the restructuring of the police and defence departments.

The PBO’s opinion of the second appropriation was that there were aspects of the appropriation which should not have been taken away, and required support from Parliament. More concerning, however, was the broader question of the fiscal policy objectives and the risks seen in the medium and long term around fiscal policy.

Committee matters

The Committee considered the minutes of 31 August 2021.

Mr Mlenzana said that the word “jail time” in bullet 5, line 4, should read “jail term.” He moved the adoption of the minutes as amended, and was seconded by Mr Qayiso.

The Committee secretariat said that the Committee would continue with its meeting scheduled for tomorrow. An application had been made to the Office of the House Chairperson for the Committee to be granted permission to meet during the constituency period in order to finalise the budget – the response was awaited.

Mr Mlenzana asked if the management of the Committee could advise Members in time on the agreed times for the meeting.

Chairperson’s closing remarks

The Chairperson reiterated that the Committee had been given permission to continue with its work for the week, and had communicated with the management in Parliament on how to proceed during the constituency period.

He asked Members to continue reviewing the issues that had been raised in the meeting, such as the issue of the urgency of the items raised in the Appropriation Bill and the other pressures on the fiscus. The Committee would also wait for feedback from the PBO on the issues raised so that they could engage with National Treasury,

The meeting was adjourned.