2022 Budget: FFC & PBO briefing

Meeting report

Chairperson Mahlangu welcomed the members from the four Committees. She also welcomed the delegations from the Parliamentary Budget Office (PBO) and the Financial and Fiscal Commission (FFC). She welcomed all those in attendance. She requested that when anyone spoke that they turn on their video because the meeting was being viewed by the public. The mics should remain muted unless the members were speaking.

She asked for the agenda to be displayed. The Joint Committee would be receiving two presentations today from the PBO and the FFC. Both presentations would be given first. The PBO and FFC would be given 40 minutes each to deliver their presentations. The members would be given 90 minutes to discuss the presentations because there was a very important subject on the table.

She requested that the Committee Secretaries provide the apologies.

Chairperson Mahlangu noted that some MECs from the provinces would be present.

Briefing by the Parliamentary Budget Office on the 2022 Budget

Dr Dumisani Jantjies, Director, PBO, and a delegation from the PBO briefed the Committee on the 2022 Budget. The presentation discussed the flow from the Presidential policy priorities to the spending priorities of government, the Budget reforms, the structural changes required for economic growth, changes to the fiscal framework and changes to the tax system.

Introduction

Significant risks to the fiscal outlook include the introduction of unfunded spending programmes another economic slowdown, higher borrowing costs, the contingent liabilities of state-owned companies and higher than budgeted public service wage settlements.

The global and domestic economic outlook and recovery has improved since the 2021 mid-term budget, as result, there has been additional tax revenue generated.

It was unclear whether the 2022 Budget’s macroeconomic and fiscal policy assumptions took into account the tensions between Russia and Ukraine. This situation has deteriorated into armed conflict since the Budget announcements. This conflict could affect the economic outlook and pose significant risks to the fiscal framework.

South Africa, Zimbabwe and Russia are major global producers of platinum group metals (PGMs). Economic sanctions on Russia (including supply of PGMs) may lead to increased demand for South Africa PGMs at higher prices. Such a scenario could lead to higher-than-expected tax revenue collection from the mining sector.

Government estimates that the current budget proposals (and assumptions) should lead to the realisation a primary balance earlier than anticipated in the mid-term budget. An important question to ask is what the cost has been of balancing the books. By the government’s own admission, they are unlikely to realise many of the targets of the NDP. The economy has also not seen adequate levels of real investment, even though, the government has repeatedly argued that that stabilizing debt would lead to real investment in the economy.

Policy priorities

The 2022 Budget extends government’s support to poor and vulnerable South Africans.

• The Budget is meant to responds to immediate needs of low-income households by providing short term assistance. However, the inflation adjustments to income tax and the unadjusted rebates for pensions and medical aid mean that the budget also provide support for more affluent households.

Medium-term fiscal policy focuses on:

• Allocation for the social wage.

• Supporting youth employment (despite evidence not been presented on the effectiveness of a youth employment incentive) and the creation of short-term jobs in 2022/23 and 2023/24.

• Additional allocation in higher education for NSFAS.

• Teacher retention in basic education, even though, real per capital expenditure on basic education and teacher student ratios will decline over the MTEF.

• Health budgets for new hires, and the continued response to COVID-19 while real per capital expenditure on health declines to below what it was in 2019 20 before the pandemic.

How does Government correct mistakes and improve performance?

Challenges identified by government include:

• Tensions in the political administrative interface

• Instability in administrative leadership (5-year contracts)

• Skills deficits

• The erosion of accountability (monitoring and evaluation system)

• Poor organisational design (programme design)

• Low staff morale (due to poor infrastructure and support)

Tools available to ensure efficiency and effectiveness:

• 2019-2024 MTSF priority 1 provides for actions that need to be taken for a developmental state that will provide conditions that grow the economy, create jobs and improve society’s quality of life.

• State Capture Commission

• Programme performance budgeting

• Quarterly Performance reporting/In year monitoring

• Outcome based performance

• The Programme of Action/bi-annual report to cabinet

• Evaluations/Reviews (Employment programme)

• Zero based budgeting/specific budget tagging methodologies (climate change)

• Annual Reporting

Summary

The Government’s structural reforms are slow and inadequate to boost growth and achieve meaningful macroeconomic stability over the medium and long term. The economy remains concentrated (both markets and wealth). Wealthy individuals, institutional investors (such as pension funds) and financialised non-financial corporations are not adequately allocating money towards real sector investment and job creation but to financial activities inside and outside SA. At the same time, deregulation of controls is allowing institutional investors to take much more money out of the country.

Extreme unemployment and inequality, continued spatial apartheid, corruption, state capture, and poor service delivery performance means that the percentage spent on the social wage is an inadequate indicator (just like GDP).

Economic recovery and reconstruction have to be inclusive and ‘not return us to the crisis before the crisis’. A new economic growth path built on increasing the well-being and buying power of the poor majority will enhance the ability of millions of unemployed South Africans to more effectively contribute to the economic future of the country.

(See Presentation)

Briefing by the Financial and Fiscal Commission on the 2022 Budget

Mr Chen Tseng, Head of Research, FFC, and a delegation briefed the Committee on the 2022 Budget. The key issues covered in the presentation included the consolidated Government fiscal framework, the financial performance of SOEs, the attempt to broaden the tax base, and balancing economic and social recovery with ensuring sustainable public.

Consolidated Government fiscal framework

• A consolidated budget deficit of 6% of GDP is projected for 2022/23, narrowing to 4.2% of GDP in 2024/25.

• Debt servicing costs will exceed R300 billion per year from 2022/23, becoming the fastest growing spending item.

• The poor and inefficient financial performance of State-Owned Entities still weighs on public expenditure.

• A narrowing tax base due to rising unemployment may put pressure on public spending, increase the budget deficit, and increase borrowing requirements.

Guarantees to State-Owned Companies

• In 2022 23 contingent liabilities will reach R 1.17 trillion, accounting for 18.11% of GDP due to tenacious SOE cash shortfalls and stringent borrowing requirements Guarantees primarily drive contingency liabilities to SOEs, which account, on average, for more than 50% of the total contingency liabilities.

• If all the SOE guarantees were to materialise, government debt would increase to more than 100% GDP by 2026 highlighting the urgency and importance of reforming SOEs in light of the immediate risk they pose to the fiscus.

Financial Performance of State-Owned Companies

• SOEs play a very significant role in economic development but their worsening operational and financial performance are placing a heavy burden on the fiscus underscores the urgency to address their weak performance.

• The financial health of SOEs as measured by key financial ratios reflects weak financial performance as both the profitability and solvency ratios are deteriorating. The decreasing net asset values resulting from increasing liabilities as well as net losses for SOEs attest to their poor financial health.

• The Commission supports the proposal for a centralised shareholder model for commercial SOEs as proposed by the PCRSOE as well as the government initiative to publish a framework outlining the criteria for government funding of SOEs.

Balancing recovery and fiscal sustainability

• The 2022 Budget placed stronger emphasis on a people centred or social recovery by allocating over R1.1 trillion, providing consumption and investment boost and retaining economic function expenditure.

• The bi-directional impact of these interventions on the economy needs to be well understood to inform the national fiscal framework in the future.

• The Commission recommends that the budget process for 2023/24 focus on aligning the allocations to Economic Reconstruction and Recovery Plan informed by comprehensive budget and expenditure reviews.

Concluding remarks

The Commission supports Budget 2022 and government’s continued commitment to consolidating public finances while providing support for the pandemic response, job creation and social protection. The Commission further emphasises certain points:

• In terms of the South Africa’s growth prospects, the Commission’s view is that it is improbable that the economy will return to pre pandemic production levels within the year.

• Regarding revenue and tax policy, the Commission supports government’s approach of focussing on broadening the tax base, improving administration and lowering tax rates.

• The Commission welcomes government’s decision to use a portion of the revenue windfall to lower the gross borrowing requirement and reducing debt issuances. However, the Commission cautions that debt stabilisation risks remain elevated and pose significant challenges to public finances.

• Fraud, corruption and fiscal mismanagement (in the form of fruitless and wasteful expenditure) remain rampant. The Government must take decisive and prompt actions against the perpetrators of these wastages and leakages to send a clear message that the Government is serious about addressing this challenge.

(See Presentation)

Discussion

Mr A Shaik Emam (NFP) had a question for both the PBO and FFC. What role did they play in giving guidance and advice to the Minister of Finance? What levels of engagement existed between their structures and Government, particularly the Cabinet? He discussed corporate tax and the one percent tax reduction. Did the PBO and FFC think that it was necessary? He was not sure if that was going to entice or encourage business to invest in the country. Would the PBO and FFC agree, that businesses would be more interested in political stability and security in the country? Would dealing with the issues of crime convince them that South Africa was indeed a prospect for investment?

He discussed NSFAS. The PBO and FFC welcomed this allocation, and he did as well. He noted with concern that there was a 60% dropout rate in the first year. The quality of education needed to be addressed rather than just rolling out funding which a great percentage of was wasted because of the high dropout rate in the first year.

He discussed the issue of policing and the 12000 new recruits that were going to be received. What was going to be the positive impact of this? These were new recruits that still needed to be trained which would then become constables. On the other hand, there were many leaving the police force because Government had reduced the retirement age to 55 which meant that the police force was losing a lot of skills. Many of them were also unhappy about the promotion system in the country. Was there going to be a positive impact on policing within the next couple of years because it would take the recruits a long time before they gained any experience? In the previous financial years, there was a reduction in the allocation to the police and now Government was increasing it. Overall, there was a net reduction and not an increase.

He discussed the Social Relief of Distress (SRD) grant. 46% of the people in the country were on some form of grant. What were the risks of this in the long term? Was this sustainable? Should other measures not be put in place to have a more productive, more inclusive economy rather than having people rely on the R350. It does some good for them, but it does not do enough. South Africa had a three-tier Government. The NFP had repeatedly called for a district model. There needed to be a national and district tier to contain the cost and spend less money on administration. More money needed to be spent on goods and services. Government was almost introducing a fourth tier of Government which was going to increase the public sector wage bill. He wanted to know the view of the PBO and FFC on this issue.

He discussed the skills that were leaving the country. The people who were leaving the country were very well skilled and were the taxpayers. About 13% of people pay taxes in this country, and of that small percentage many of those people were leaving the country. The presentations correctly identified the challenges facing State-owned entities. State-owned entities had the responsibility to promote infrastructure development. How did the PBO and FFC envisage South Africa deal with this problem given the state of State-owned entities? South Africa had the capacity, the capability and the human resource to become a manufacturing giant for exports. How would the PBO and FFC deal differently with the fact that every other item in the country was imported? This had a massive impact on the manufacturing sector which was being shut down.

Dr D George (DA) directed his first question to the FFC. The FFC had spoken quite a bit about the State-owned enterprises and its view on the role of SOEs, which he did not share. The FFC spoke about the new SOE which the others would report to. It would hypothetically look after the other SOEs. From the presentation, it was clear that the FFC liked the idea. He could not think of a worse idea. Why did the FFC like that idea? What made the FFC think that it was going to be any different? There were all these SOEs, and everyone knew the problems. Why was it going to be different if there was another SOE that was overseeing the other non-functional enterprises? Why would it be different? What made the FFC think that? How did the FFC reach that conclusion?

He directed his next question to both the PBO and FFC. Both had done their projections and displayed some numbers, which was good. What assumptions were being made? When, for example, the PBO and FFC factored in the public sector wage bill and the SOEs what assumptions were being made? On the public sector wage bill, was the PBO and FFC assuming that it would continue on its current trajectory? He wanted the PBO and FFC to be clear on the assumptions they were making. On the SOEs, given that there was going to be a reduction of money put onto them what assumptions were the PBO and FFC making? Was there an assumption that there would be no additional bailouts? Or what was it that the PBO and FFC were factoring in? He was interested to know how the PBO and FFC were deriving their numbers. It was important that South Africa attracted investment capital into the economy. The key sources of that were local and foreign business, and also encouraging domestic savings. From what he saw on the Budget there was no stimulation to encourage domestic saving by removing some of the tax barriers, for example increasing the limits on the tax-free savings accounts. What was the PBO and FFC’s view on the measures taken to stimulate domestic savings and also to attract investment capital, both local and foreign?  

Mr M Moletsane (EFF, Free State) directed his questions to the FFC. On slide nine of its presentation it mentioned that according to the expanded definition of unemployment, the unemployment rate increased by 2.2% to 46.6% in quarter three 2021 compared to quarter two of 2021. Did the FFC think that there was any possibility for this country to recover and reduce the unemployment rate any time soon? His second question was based on slide 11. It stated that debt servicing costs will exceed R300 billion per year from 2022/23, becoming the fastest growing spending item. Will South Africa be able to recover from the debts?

Mr D Ryder (DA, Gauteng) said that it was an interesting Budget. There were comments about the social wage bill coming out of the PBO’s presentation although there were some contradictions in that presentation. The President mentioned in his response to the SONA debate the issues around the crowding out of the social wage bill. It was important to note that there was acknowledgement that there was a crowding out at this stage. It would be nice to do more. A reality was that a lot of important spending was currently being crowded out by the servicing of Government debt. One of the biggest increases in departmental spending went to National Treasury and this went back to the interest bill and the repayments on Government Debt.

Crowding out of not only the social wage bill was something that needed to be commented on but one thing that was not mentioned today was the Defence Budget. It was something he picked on. There was much more reliance placed on the defence force recently. There was international instability recently and there was regional instability as well. He noted the issues in Mozambique. He discussed the recent deployments and the financial implications it would have on South Africa. He noted the reliance on the defence force during the July insurrection of last year as well as through the Covid lockdowns. In July there was a comment from the defence force that they had to ‘reach into the back of the cupboard’ in order to ensure that they were properly capacitated. In spite of that their response was deemed to be inadequate. There was a general acknowledgement in many publications that there was insufficient funding for the simple maintenance of what the country currently had. The country was not even in the position to enhance its defence capabilities. The navy vessels were not being repaired. There was just no money in that Budget to enable them to be repaired. The air force was in a worse position, at least the navy received a small increase this time. The air force did not get any increase. This had real impacts. The corporal that was killed in Mozambique towards the end of last year, there were indications that this came about as a result of a lack of air support. That lack of air support was just because there were not enough helicopters and not enough planes. He would have liked to see more comment about the crowding out of spending in other Departments.

He reminded the PBO that it was presenting to Joint Committees. One of his big concerns was the 9% allocation to local government. He had the 2020 publication by the FFC. There were a lot of good things that came out of that publication speaking about the insufficient allocation to local government and that it needed to be increased. There was a very small increase in that. He believed, this applied to both provincial and local increases, that these were paper-based increases only. There was a move towards taking direct grants to local and provincial government and moving them to indirect grants. Effectively still spending the money in the National Department but repackaging the way it looked so that there could be a little bit of lip service that there was a move towards better funding in the other spheres. He wanted to specifically hear the opinions on that from the FFC, in light of the document that was published in 2020/2021. The country heard about an infrastructure-led economic recovery. This went back to the 2021 discussions from the President. He did not think that the infrastructure spend in this Budget was sufficient enough to really kick-start the local economy. He wanted to hear from both presenters on that issue. Looking at the economy over the past year, the construction sector was by far the one lagging. There were good increases in mining, agriculture and manufacturing but the construction sector seemed to be lagging behind. It flew in the face of what Government was saying. Government said that it wanted an infrastructure-led recovery. The spending was not happening to do that. The result was that the construction sector was suffering. He noted Mr Shaik Emam’s comments about the creation of the fourth tier of Government. The idea of devolution was being followed across the world. Devolution was something that was being pursued. Kenya followed an excellent model. Zambia had gone towards better devolution. Yes, South Africa was creating more of a tiered-hierarchical structure. The costs associated with that were quite heavy.

Mr W Aucamp (DA; Northern Cape) discussed the presentation of the PBO. There was mention on page four of the conflict in Ukraine and the effects that might have on the economy. It was not a conflict in Ukraine, it was a full-scale war happening in Ukraine which Russia started without being provoked. It was said that it had not been worked into any of their calculations. This was a Budget where there was no room for error. The unprovoked war in Ukraine will have a huge effect on South Africa’s economy. He noted with concern the potential fuel price if the Dollar strengthened, and the Rand weakens and if the oil that was produced by Russia did not get distributed. It would have a huge impact on South Africa. The Government needed to do much more in order to stop this inhumane war that was happening so that the effects of the economic downfall on South Africa’s economy would be limited. To call the situation a conflict was the understatement of the year.

It was disturbing to see on page eight of PBO’s presentation that some Departments, like the Department of Health, had to surrender their funds. There needed to be more consequences for Government Departments that did not spend money that was allocated to them. The Committees heard about this every year, but it did not see any consequences.

The big elephant in the room remained the Government labour bill, which was too high. on page 15 of the PBO presentation it asked, ‘how does government correct mistakes of the past?’. Government continued with increasing the wage bill, issuing guarantees for failing SOEs and bailouts for SOEs, cadre deployment and BBBEE policies. These were all factors that would not assist in correcting the mistakes of the past. Government should be at a point where it did not correct the mistakes of the past but where the country flourished based on things of the past. It was a long way before the country got there.

He discussed page 33 of the FFC’s presentation. It was stated that ‘if all the SOE guarantees were to materialise, Government debt would increase to more than 100% GDP by 2026, highlighting the urgency and importance of reforming SOEs in light of the immediate risk they pose to the fiscus’. SOEs would not be reformed if Government kept on doing the same things. SOEs will remain in the same position. Government would continue to give bailouts and provide State guarantees. It will become more than the country’s GDP. If Government really wanted to transform SOEs then it needed to look into privatisation, especially the big SOEs that had large amounts of assets. If Eskom was privatised then there could be a huge amount of money that could come in. There could be skills that could be obtained with that money and Eskom could be turned around. It would not be turned around if Government continued in the same trajectory.

He discussed the equitable share formula. Parliament heard every year that there were certain provinces like the Northern Cape which requested for equitable share formula to be changed in order for it to better reflect the rural positions of certain provinces. It was promised every year that it would be done and that it would be looked at. There were still no results with regards to that. He wanted to follow up on that matter. What advice could Parliament give to Treasury to immediately try and implement that.

Mr W Wessels (FF+) said that it was clear that there were needs and demands that were ever-increasing while the country did not have the luxury of funding to spend on the needs and demands that there were. He asked a question to the PBO and the FFC. Looking at the appropriation, there was one line item under Home Affairs that increased quite significantly over the medium term. It was increased by 120%. That was the Represented Political Parties Fund, which in the previous financial year was R166.8 million and it increased in this financial year to R342 million. This was more than double. It would increase over the medium term to R366 million. What was the opinion of the PBO and the FFC on this? Did this serve the purpose of addressing the ever-increasing social needs? The Committee heard about the teacher-student ratio, the local government allocations which were insufficient, the infrastructure demands and the issues around security. He wanted an analysis on that issue.

Dr B Masuku (ANC, KZN) made a broad comment that he wanted the PBO and the FFC to respond to. He discussed the unpredictable environment and context in which the budgeting had taken place for the past two years. The environment was volatile. There were things that always needed to be taken into account. He noted the issues related to climate change and how it had disrupted a number of projects. It had also impacted infrastructure which was not well maintained.

The pandemic has exposed a number of shortcomings in Government’s planning and budgeting. He emphasised the point that Government’s budgeting and prioritisation must reflect on strengthening infrastructure delivery and human resource. He wanted to know how Government could enhance public–private partnerships (PPPs) in terms of infrastructure delivery?

He discussed Government’s ability to deliver infrastructure in particular reference to schools, clinics and hospitals. Infrastructure delivery was slow and sluggish. Sometimes it was non-implementable because Government relied on the fiscus which then took infrastructure longer to deliver. The pandemic exposed that Government needed a quicker and rapid way of delivering infrastructure. Grants needed to be used from foreign international agencies to help Government to deliver infrastructure. There were things that Government needed to consider. South Africa needed more hospitals, more clinics and more schools. The PPP model could help South Africa. It was something that needed to be considered.

He discussed the conditional grants. The conditional grants should be used to strengthen the various aspects of service delivery. There were concerns around the Government’s ability to employ nurses, doctors. It was embarrassing when a Government could not employ people that it trained. There were community nurses who the Government had released. The Public Service released them because it could not find available posts or there was no funding available for employability. There were grants that Government needed to utilise to strengthen those essential services, in particular the Health Services as it related to Government’s response to the pandemic. The post-Covid recovery project needed to include strengthening primary health care. He highlighted community workers who had been instrumental in the fight against the pandemic. Community workers could still be utilised going forward in the fight against HIV, TB and other non-communicable diseases which had ravished South Africa’s health care sector. He was not sure how Government could enhance the grants that related to education in terms of teacher employment. Government needed to look at how the teacher-student ratio could be impacted.

He discussed local government. There were municipalities across the country that were economically depressed and did not have the ability to source funding outside of the grants that Government gave them. The struggling municipalities needed to be focused on where service delivery was not taking place because there was no sufficient funding. The post-Covid recovery, beyond the economy, needed to deal with the basic services that were important to deliver. It was important for Government to also consider the provinces where there was a high population density that might need to be given more in terms of the equitable share.

Mr O Mathafa (ANC) discussed the global economic outlook that the PBO highlighted as areas that the Committee should be concerned with. The FFC had also touched on it. He discussed the ratings agencies. It had been highlighted as a factor that needed to be considered. Were funds being allocated to those areas, particularly those areas identified by agencies in the previous two downgrades? In the previous two downgrades sovereign debt and issues of reforms were raised. Was this Budget sufficient to respond to those particular issues?

He discussed the global economic outlook and the risks that were associated with investments. He agreed with both presentations that the corporate income tax was not the only risk that could deter investments. There were areas like the environment, especially as affected by climate change. In one of the engagements, he had with the Department of Water and Sanitation, it indicated the economic impact on the Vaal Water System if it was not fixed. Everyone knew the challenges that were posed by this particular system. He also highlighted the Centurion Lake. Centurion used to be a hub of investment but because of the state of the lake that was contaminated with waters flowing outside the City of Tshwane, most companies had left.

He discussed the budget allocations. He referred to the slide that spoke about the functional budget structure in the PBO presentation. Mr Ryder had spoken about the meagre allocations to defence. He would not go into the issue of environmental protection. There was a little allocation to this particular area. This had persisted, going back a few years. Was there a way Treasury could relook at this particular area?

He also thought that not enough funds were allocated to the area of recreation and culture. There were a lot of unemployed youth. The FFC presentation stated that the Budget did not touch on the reasons for unemployment. While Parliament appreciated the extension of the R350 grant, how would Government ensure that youth would be kept occupied and steered away from ill behaviour? The area of recreation and culture could play a meaningful role. The allocation in the Budget for that area was a point of concern for him.

He discussed the Bounce Back facility. He appreciated the fact that this facility was being made available. Just like on the issues of unemployment, the Budget did not speak to the reason why the R200 billion credit guarantee scheme did not work. If Government did not speak about the reasons why the previous facility that was advanced did not work but brought another one to replace it then that was also doomed to fail. The R200 billion credit guarantee scheme did work for some but for the majority of African-owned businesses it did not work. In all the constituency meetings, business forums where they were predominantly attended by black entrepreneurs they lamented the fact that the banks rejected their applications outright. In some instances, the banks rejected without providing a reason as to why the applications were being rejected. Did the PBO and FFC pick anything up that would give the Committee comfort that this new Bounce Back facility would benefit the broader spectrum of entrepreneurs? If Government allowed the private sector, or any sector, to run in a developmental state but did not guide them in how to transform society, both socially and economically, such failures of the R200 billion scheme would persist. That is where he differed with Mr Aucamp. The BBBEE rules were not draconian and were still relevant.

Dr George spoke about the need to motivate and ensure local saving. He had noted this in relation to the 2022 Budget tax proposals. In one of the presentations, it was said that whilst the corporate income tax was at 28%, the real nominal collection was roughly 15%. He needed clarity. How was the 15% arrived at? SARS was able to do lifestyle audits. Was a similar system of lifestyle audit for companies something that the country should consider? He wanted to know if what he was proposing anyone of the two institutions picked up anywhere else in the world? He responded to Dr George’s comments. He had been listening to the radio the previous week and it mentioned that there was a culture of saving in the country. Currently, South African banks sat with R6 trillion in liquid cash as saved in their banks. It was a concern for him that there was so much money just sitting idly and not being pumped into the economy to assist the work of Government in order to help the economy to recover.

He discussed the tax concessions that were being given to the private sector. How had Government got to the point where reducing tax would assist with increasing the economy when R6 trillion was sitting in South African banks as cash owned by companies? He wanted what companies declared compared to what they banked on an annual basis, to be discussed.

He discussed slide 39 of the FFC presentation. Here he was in agreement with Mr Aucamp. SOEs were an area of serious concern. What would the FFC recommend to ensure that there was alignment on the work of SOEs as well as Government priorities? How could Government ensure accountability? A lot of money was lost through corruption and fraud. It seemed as if there were no consequences.

Mr X Qayiso (ANC) had clarity seeking questions based on the presentations of both the PBO and the FFC. He thought it was right that Government had to correct the past apartheid errors. He directed this to Mr Aucamp. Otherwise, democracy would just slip out of South Africa’s hands. Government had to correct the past. There were areas in the PBO presentation where it did not give the Committee a clear proposal. He provided an example. The PBO said it was unclear whether the fiscal macro-economic policy took into consideration that the current situation war situation that was developing. Was there any specific matter that it wanted to advise on with regard to this matter so that it was not just a statement that was unclear?

He discussed PPPs. The PBO made reference to its research which highlighted that developing countries were moving away from PPPs. What was the reason? Why were they moving away? The PBO needed to inform the Committee whether it was working or not. What was the PBO advising Parliament after it completed its research? What should happen?

The PBO characterised the issue of unemployment to such an extent that it defined it as being an extreme determent to investment. He highlighted balancing economic and social recovery. If the issue of extreme unemployment was a deterrent to investment, then the Budget needed to address the issue of unemployment. He would love it if everything was being harnessed to address the critical area of unemployment while taking into account balancing the social and the economic factors. The presentation also discussed expansionary fiscal policy versus consolidated fiscal policy. It was not clear what the presentation was advising on the matter. Which one should the Government consider? What direction did the PBO think Government should take?

The PBO had also done research on corporate tax. The issue of corporate tax ranked number five as one of the reasons which deterred or discouraged big companies to invest in the country. What message was the PBO giving to the Committee? Was it that the issue of corporate tax not a major issue? It meant that there was something that was an issue here which it could advise the Committee on. There were real issues that were a deterrent to investment, including the extreme unemployment.

He asked Mr Sachs if the FFC still had the same view with regard to the funding model of local government municipalities which was spoken about last year? He wanted to know if this was still an issue because at a certain stage this issue was sharply raised by SALGA. He had not heard the FFC making this an issue once more. He highlighted that there was now a district development model. Some of the areas would be reconfigured in such a way that there was a maximum utilisation of budget.

He discussed economic recovery. The FFC said that basic infrastructure by local government seemed to have declined over a particular period. At the centre of economic recovery, the State-owned companies were supposed to play a very critical role. The state of SOCs had become very dire. It needs a very serious intervention. There needed to be drastic measures to ensure the survival of SOCs so that they played the critical role in the developmental state. If the basic infrastructure at the level of local government is not enough it caused a lot of challenges for economic recovery to take place given the situation SOCs found themselves in. The basic infrastructure and the life of the SOCs determined the survival of the economic recovery plan in general. If there was any impediment in that area that would be a very serious problem that needed to be looked into. The economic recovery plan needed to find its footing.

Mr E Njadu (ANC, Western Cape) congratulated the Minister of Finance on a well-balanced Budget for 2022. It was much better than the 2021 budget. He welcomed the presentations from the PBO and FFC. He discussed the increase to provinces. A previous speaker said that it was a paper exercise and lip service. He did not believe that was the intention of National Treasury on the increase to provinces. The NCOP carried the interest of provinces. He wanted the PBO and the FFC to provide their opinion on the impact that increase would be for provinces and municipalities. He discussed infrastructure. He raised the role of provinces and municipalities on this matter and how to fast-track the infrastructure. He wanted the PBO to advise the NCOP on its mandate and how to do its oversight. As the Budget was presented, Government needed to hit the ground running.

Mr J Maswanganyi (ANC) discussed the debt service cost as the fastest growing. Did the PBO and the FFC do scenario planning? The way things were going it looked like the country was going to encounter a serious problem in the near future. There was a denial that South Africa would not get into a stage of debt trap. The trends showed that if this thing is not contained that the country would be in trouble. Scenario planning projected what might happen in the future and then Government planned accordingly. Was it possible for the PBO or the FFC to do that research work? It entailed a lot of work which not everyone could do, to do scenario planning.

Mr Y Carrim (ANC, KZN) discussed the PBO’s mention of a new economic growth path. He wanted the PBO to deal with some elements of what it thought a new growth path would be? He wanted the PBO to discuss the corporate tax and its impact on investment. What were the top four factors above corporate tax that deterred investment? He moved onto the FFC. Global growth was beginning to emerge and there was some recovery that had been happening recently. What were some of the reasons as to why the growth was going down? There was the increase in inflation rates and interest rates in much of the developed world. Surely, there were other elements?

Chairperson Buthelezi wanted to get the view of both the FFC and PBO on the consistent above-inflation increase of electricity prices and its impact on GDP growth, gross fixed capital formation and employment.

When VAT was increased there was an understanding that if there was any opportunity to decrease any tax it would be VAT. That was because of its regressive nature. The current Budget instead of dealing with VAT, dealt with income tax. He wanted to hear the view of the PBO and the FFC, particularly of Mr Sachs. He said he would leave the other questions for future engagement.

He said that the PBO would respond first, thereafter the FFC would respond. He allowed Ms Thakur-Rajbansi to ask questions before the PBO responded.

Ms S Thakur-Rajbansi (MF, KZN) discussed the ECD shift to DSD. She saw that no amount was put there. It affected all provinces. She hoped that at some stage they would receive the amounts that would cater for each province and that shift.

She raised the issue of job creation. The President had a programme called the Pathway Management Network. It looked like a centralised project for job creation and was welcomed. She would have liked for there to be a policy document because how would each province engage in that programme to offset their unemployment levels. How much of that would be directed to KZN?

She discussed the housing grant. She saw that it had been terribly reduced, nearly 50%. She noted that the Budget needed to go more towards preventative measures rather than just being symptomatic. In this grant it was being miscalculated. As much as the other grants were important and were reduced, the housing grant was just as important. If people did not have that first primary asset then there would be no wealth creation and wellness. That decision was terribly skewed. That housing grant was most important. The other budgets would decrease in the outer years.

She liked the strengthening of the district health system. It was something that was fought for a long time. That was welcomed. She raised the issue of the PPPs. She agreed with the other members. Why was South Africa moving away from the PPPs? South Africa needed everything. The country did not have wealth tax. It was very important that South Africa went into PPPs. She did not know how that research was done. She hoped a copy of the research was provided because she sure that some of the BRICS countries had not been included. Just this morning the media in India announced that there was a national masterplan on PPPs, and it was a developing country. The PPP policy of South Africa needed to be reviewed.

Dr Jantjies said that he would touch on a few points and then he would hand over to his other colleagues to respond. He discussed the issue of the social wage and the support given to low-income households. The 60% was not entirely what went to low-income and poor. There were measures that crowds out 60% as it related to social wage. He discussed the R350 social grant supporting the low-income households. It should be seen as an investment in the economy. When low-income households spent money, they spent money in the economy which should be seen as economic activity. That caused the economy to expand, that could lead to job creation and more revenue by the State. There needed to be a realisation that some people would not work and needed support. He noted that not everybody would get work because of the structure of the economy and the longstanding issues of society. Supporting those households is one way of stimulating the economy.

He discussed the delays to the corporate income tax. Government’s objective was trying to have a net effect when it reduced the interest rate. When it reduced the rate, it reduced expenditure as well to have a net effect on the revenue generated in the country. PBO’s argument was that there had already been discussion around the need to reform the income tax. There have not been many conversations around that. That was a point the PBO raised. The PBO was also looking at the tax space. The tax space took different forms. Increasing connectivity was important and increasing economic growth. There had been a lot of discussion around how Government ensures that the income and profits that were earned through the digital economy were also regard as being part of the tax space. In recent times, the PBO realised that there was a need for developing countries to think about how they were going to do it over the short and medium term.

He discussed the country’s ability to attract investment. There were other factors beyond tax. Stability and protection of assets were some of the main factors.

On PPPs, he noted that the PBO had raised some points around the economic recovery plan, last year, and some of the measures that were proposed in the recovery plan of Government’s balance sheet. He raised the issue of PPPs leading to contingent liabilities. Parliament did not have oversight over contingent liabilities.

Dr Nelia Orlandi, Deputy Director: Public Policy, PBO, said that in the Budget speech the Minister indicated the Government was going to review the entire structure of COE. Government was also going to review all of the initiatives that it currently had in terms of job creation. It was going to review all of the smaller public entities and it indicated that there were initiatives in terms of infrastructure. The Minister also indicated that several Departments were required to restructure to be more efficient and effective, and with regard to their compensation structures. Some of the questions asked related to those things. There were initiatives in place. Government was going to start with reviews.

She responded to Mr Ryder’s concerns about the defence budget. There was a policy decision that defence would also restructure. That might be the reason why Government was slowly reducing the proportion spent on defence because there was a lot of restructuring. The PBO produced a document last year on certain budget cuts. The PBO had included a budget analysis on defence. Some of the things the PBO realised there was that a lot of functions of defence had moved from certain military bases. Those military where the functions were removed to another base, those military bases still exist. Those bases were still maintained but did not really provide a service in terms of defence.

She responded to the questions of Mr Aucamp on how Government would correct the mistakes of the past. This did not refer to the past, pre-1994, it referred to the recent past. In terms of the first medium-term strategic framework 2014-2019, Government realised that it was not implementing the objectives of the NDP, so it reviewed. It found that the instability in administration, skills and various other factors were actually hampering Government. Government realised that it needed to start implementing new initiatives to correct those mistakes. All those corrections were captured within priority number one.

She responded to Mr Wessels’ question about Home Affairs. The additional money allocated to Home Affairs was to fund political parties. There was a policy decision that it would establish a public entity to make the funding to political parties. Those funds were allocated for goods and services as well as for consultants to establish this public entity.

She discussed the funding for recreation and culture, and environmental affairs. She often asked the question ‘what would I do?’ if she had to restructure the budget in terms of the function groups. She did not know. Would Government want to take money away from education to allocate it to environment or recreation? She did not know, and she did not know what the members’ views were. What would the members do if they had to restructure the proportions that Government spent on the different function groups?

Dr Seeraj Mohamed, Deputy Director: Economics, PBO, discussed the level of debt in the country and the issue of expansion of fiscal consolidation. The second issue he would discuss was incentivising savings and investment. The third issue he would touch on was PPPs and to clarify what was in the PBO report on that. Finally, he would discuss the new economic growth path which was slightly touched on in the PBO presentation.

He responded to the issue of debt and investment. Mr Shaik Emam praised the spending on NSFAS but was concerned about the high rate of dropouts. The Committee also raised the question about why Government spending was so much money on social grants. The answer that underlies a lot of these issues was the importance of poverty, inequality and unemployment in the economy. The PBO spoke about the triple crisis all the time. He thought that the message did not actually hit home even with members of Parliament, the media and economists. He noted how severe and toxic the impact that has on the economy. He related that to low levels of investment. How many students drop out of university? How many students dropped out of high school? What were the repeat rates in high school? Government needed to spend more on current grants and developing a more comprehensive social security system. This was one of the major themes coming out of the pandemic, but it was present even before the global financial crisis. The level of inequality globally was recognised as a problem. South Africa was the outlier, worst and most obscene case of that. People did not take that obscenity and toxicity of it into account and how it affected everyone in the country. It impacted even the richest people, their ability to choose and freedom to invest.

The second theme that was big globally was the impact of the environment. Environmental change was linked to the levels of inequality, unemployment and poverty globally and within South Africa. The poorest women and children were going to be suffering more because of that. That should underlie everyone’s thinking. When people spoke about levels of debt, spending enough the question needed to be asked whether Government was actually addressing the fundamental problems within the economy that was causing low growth, low investment and the inability for South Africa to move forward. In looking forward to shaping a new growth path forward for the economy those issues need to be at the centre of it. At the moment Government was still thinking of things in terms of targets. Like what is debt to GDP? Was the country in a surplus? Those are not actually targets. Those were tools to reach there and should be subservient to economic growth path and development path that the country should be striving for. The question was, was debt too high? Was South Africa going to get into a fiscal crisis? In order to grow, invest in infrastructure, to improve people’s lives so that they could make meaningful contributions to the economy, it was necessary to borrow. In many developed countries, since the global financial crisis, they turned towards their central banks to directly finance Government debt. National Treasury and the Reserve Bank have not come to the PBO with viable alternatives to explain why Government was not considering the possibility of using that for specific types of spending. In developed countries, there was a huge amount spent on decreasing the Gini coefficient even in the most equal countries like the Nordic countries. Over time, especially with increased integration globally of financial markets and trade markets there has been inequality increase but there was greater transfers and money spent on basic services in those countries to reduce inequality. Where inequality was low there was a recognition that inequality was a problem and that it was toxic for society. South Africa needed to build on that. In terms of creating debt, Government needed to consider what the money was going to be used for. Was it going to be used efficiently? Was it actually going to address inequality, unemployment and poverty? Was it going to cause the country to do more economic activity in a positive way?

He discussed the issue of investment and savings. The question by Dr George was why incentives for those things were there not more. A lot of people, including within Government and National Treasury, drew on the thinking about savings that they saw in first-year textbooks that savings equals investment. They thought that if Government borrows more it crowds out the ability of the private sector to borrow because savings equals investment. They did not think about what happened to those savings before it was invested and how much of those savings were going into investment. If a lot of those savings were going into pension funds and other institutional investors who were then taking that money abroad and keeping it liquid in other financial markets. Those savings were not going into real productive investment that was going to help the economy grow and move the country along the new growth path that was going to create jobs. Savings, investment and the impact of Government borrowing needed to be thought about seriously. Government borrowing may actually be allocating more investment especially if it was in productive spheres, like infrastructure or improving the lives of the poor. Credit allocation to the private sector was increasing but there was no concomitant increase in real sector investment, fixed investment.

He discussed incentives and what was going to drive real sector investment that was going to create jobs and increase the productivity in the economy. Government needed to look at what role the financial sector played and how that credit was allocated.

He discussed PPPs. The point made was particularly related to what was seen in developed countries. When the US allocated $1.3 trillion towards infrastructure it was said by President Biden that a lot of that was going to be done by Government itself. In developed countries there was this concern with PPPs because there had been an assumption that the state was not effective that there was more corruption and that the private sector was more organised. The experience has not borne that out, even in the developed countries. He discussed privatisation and provided the example of the British rail privatisation. Some authors have called it ‘the great train robbery’. The government had to bail out the private sector. The government had to provide guarantees to the private sector in terms of minimum incomes to make sure that the private companies keep operating and were profitable. This was done so that the services provided through PPPs carried on. Those then entered back into the budget. The Director of PBO said that when those fell under contingent liabilities those fell off budget and were not within the oversight of Parliament. Once Government has to step in and pay the money then it came on budget. That happened later and often that could be bigger. It was a warning about being careful about the approach. Government needed enough contingent reciprocal arrangements and penalty clauses within PPPs. Government also needed to consider whether it could do some of these things, especially at provincial and local government level more effectively. The private sector also may not want to get involved. The private sector was based on profits, and it did not want to do many of the social projects that may not have the kind of returns and profits.

Dr Jantjies said that any follow-up questions would be responded to in writing.

Mr Michael Sachs, Deputy Chairperson, FFC, thanked the members for an interesting set of contributions. It would not be possible for the FFC to answer all of the questions asked given the time constraints. The FFC would try and address a few. He responded to Co-Chairperson Buthelezi’s question about taxes. His summary comment on this Budget was that there was a contradiction between the present and the future. If the expenditure side was looked at, there were very large additions to expenditure in the present. By the present he meant Budget 2022. Government added R100 billion to expenditure. Last year R95 billion was added to expenditure. It was then said that in the future there would be significant cuts to expenditure. There was a parallel issue on the tax side. Where Treasury was signally strongly that the future demands that the structural increases in expenditure be financed by structural increases in taxation, which he thought was correct, but for the present Government wanted to cut taxes. Government did not want to raise taxes on anybody. It wanted to provide relief for fiscal drag. Government did not want to raise fuel levies. Government wanted to lower corporate income tax. It was odd that Government would signal so strongly the need to reduce expenditure tomorrow but today it was raising expenditure significantly. Government signalled the need to raise taxes tomorrow but today the aim was to lower taxes. There needed to be a serious debate about raising taxes because taxes were going to have to go up. There was no doubt about it. He discussed the scenarios around debt. South Africa did not need a scenario around debt because the issue was not what was going to happen in the future. It was happening today. In the framework that the FFC was presenting, over the next three years the largest expenditure item was debt service costs. That was really the issue. It was not about the level of debt. It was about the amount taken from national income and tax revenue and handed over to foreigners and the wealthiest households in the country. On average, over the medium-term framework Government would be taking around R333 billion every year out of tax revenue and handing it over to foreigners and the most affluent households. That was what debt service costs were. That R333 billion was the largest expenditure item in the Budget. This was not a scenario about the future. This was something that was happening right now. Unless it was addressed it would get significantly worse. Over the next three years debt service costs were going to rise by around 14%, in nominal terms, every year. Whereas the health budget was growing at 2.3% in nominal terms, far below inflation. That was the situation the country found itself in. There were three ways to resolve that issue. The one was to reduce spending. The programme on the table went as far as could be imagined. The second was to raise taxes. The discussion about that had not even begun. The third was to accelerate economic growth. Everyone would like that to happen but there was no agreement on how to make it happen. Whether Government raised taxes through corporate income tax or VAT or personal income tax, in his opinion all three needed to go up. It would only depend on what was the balance between those three. There needed to be a debate on where that balance needed to be struck and how much Government could afford to raise taxes in order to stabilise the country’s fiscal position and pay for the huge structural increases in expenditure that had been announced in the Budget.

Prof Trevor Fowler, Commissioner, FFC, discussed the change in the percentage that was going to local government and provinces. The key point made about the increase to local government was that it was welcomed. In spending that increased equitable share, it needed to be ensured that the expenditure was directed in a way that will have an impact on growing the economy. In the last ten years, there was a downturn in commodity prices which contributed to the economy declining besides other factors. Now that commodity prices had started to increase there was still the impact of the pandemic in terms of the number of people who lost jobs during that period. Government needed to find the mechanism to address the benefit of the upturn in commodity prices to take advantage of that. He discussed the efficiency of local government spending. In a study which was done recently by the Gauteng government, it showed that the support of National and provincial government on local government was not sufficient to ensure a turnaround in the efficiency and effectiveness of their expenditure. Most of the support was really about, from an oversight perspective, a box-ticking exercise. That was inadequate to turn it around from an economic point of view. There needed to be a specific objective. There was a balance between social expenditure and economic expenditure to ensure that both were growing. There needed to be a virtuous circle between the two. There needed to be expenditure in infrastructure that generated economic return that allowed for greater social investment.

Mr Tseng said that very careful attention needed to be paid by members - when exercising their oversight duty - to the consistency, congruency and coherency of the research that advisors with empirical evidence provided to the Committee.

Mr Siyanda Jonas, Specialist: Macroeconomics, FFC, discussed unemployment and the possibility of reducing unemployment. It was possible for South Africa to reduce unemployment. It required both long-term and medium-term interventions. Short-term interventions were also required. Interventions that focused on the demand side were required. Interventions that also focused on supply side issues were also needed. Government needed to address some of the structural constraints that inhibit growth and inhibit growing employment. This would require a focus into certain sectors that were known to employ more people, like manufacturing. All of this would require looking into what factors contribute to the negative growth that had experienced. There were other sectors that provided an opportunity to address unemployment at a massive scale. He discussed the impact of electricity price growth. Inflation, generally, whether driven by electricity prices or other components had a negative impact on investment because interest rates would need to be increased and that had an impact on borrowing and access to capital for households. It was important for Government to address their contribution towards prices. This also included electricity prices. He responded to the question about the certain elements which slowed global growth. In the main, it was supply chain disruptions, energy price volatility and uncertainty around inflation and policy paths going into the future. Looking at the different categories of countries there were different things that were driving global growth. In developing countries, access to vaccines was also one factor driving the global growth outlook that was being forecast.  

Ms Sasha Peters, Programme Manager: National Appropriations, FFC, responded to Mr Shaik Emam’s comments on policing. In the 2021 Budget, funding was being reduced as well as plans to cut personnel head counts. In this Budget there was the reverse with a large recruitment drive. The FFC had previously raised this when it presented on the second Special Appropriations submission last year. When Departments cut spending they needed to cut areas of duplication, inefficiency and not the strategic areas of a Department’s mandate. Within police there was an opportunity to look at cutting on administration or protection and security services. If Government did not take the strategic long-term outlook the pattern of cutting for consolidation reasons one year would continue and then having to urgently increase the funding the year after because the previous cuts disabled Departments from fulfilling their core mandates.

She discussed the issue of the quality of education. There was definitely a need for the drastic overhaul of the quality of education. One step that could start that overhaul was the shift of ECD to DBE. With ECD becoming part of the formal schooling system it did provide an opportunity to properly prioritise early learning programmes. There was an abundance of research that showed that not only was investment in ECD cheaper than investing in other parts of the education pipeline, but it also comes with numerous positive spin overs. If Government improved ECD and was able to provide learners with quality early learning programmes that had the higher probability of increasing a learner’s success throughout the years. The FFC would be watching this shift and how the Department then looked at prioritising early learning programmes. The ECD shift was set to take place in April 2022 and there would be a baseline increase of R3.7 billion for the sector. Much of that was in respect of the ECD grant with the KZN province set to receive R187 million of that grant in 2022/23.

Prof Fowler discussed electricity prices. He had not heard Eskom and others talk about the fact that South Africa was between a rock and a hard place. A significant percentage of the power stations were built in the 80s and had a 30-year life span before they required refurbishment to give them a 50 to 60-year life span thereafter. That 30 years ended around 2017. There was a plan then to refurbish them, power station by power station. Unfortunately, that did not happen. As a result, there were now breakdowns. Government knew that it had to invest in renewables and ensuring that it refurbished some of these older stations that could serve the base load until it was able to have more renewables to take on some of that responsibility of power generation. At the time Medupi and Kusile Power Stations were being built, these were the largest projects in the world and there was an artisan shortage. Artisans were brought in from all over the world. The one area that was not focused on was training and skills development in the artisan area. Government tended to focus on higher education and NSFAS. That was an area that required some investment. He discussed the district model and whether it was creating a fourth tier of Government. The reason for districts being in place was because local municipalities had the responsibility to deliver basic services but there were bulk services such as water and sanitation which went beyond the boundaries of local municipalities. Some entity would be needed to address that. That was the basis for districts. The district development model was intended to try and address that problem to beyond the boundary of one municipality and be able to address it in a longer way. In Gauteng, it had the luxury of Rand Water which provided water to the entire province plus other provinces at a much lower cost than it would have been if it was provided by each municipality. There was a role of districts in that sense.

Chairperson Buthelezi thanked the delegations from the FFC and the PBO for their contributions. He thanked everyone for attending the meeting. This was the members first bite and there were other opportunities to interact with the PBO and the FFC as the Committees dealt with the Budget.

The meeting was adjourned.