2021 Budget: FFC & Parliamentary Budget Office briefing

Meeting report

Mr Maswanganyi welcomed everyone in attendance and noted an apology from Mr E Buthelezi (ANC)

The Committee Secretariat noted apologies from Mr S Buthelezi (ANC), Mr O Mathafa (ANC), who will arrive late, and Mr P Marais (FF+, Western Cape Provincial Legislature), who has to leave the meeting early. The Secretariat also noted apologies from Members of the Select Committee and of the Chairpersons of the Free State, North West and Mpumalanga Provincial Portfolio Committees.  

Mr Y Carrim (ANC, KwaZulu-Natal), Ms N Ntlangwini (EFF) and Ms M Govender (ANC, KwaZulu-Natal Provincial Legislature) asked to leave the meeting early due to other commitments.

Briefing by Parliamentary Budget Office

Dr Dumisani Jantjies, Director, PBO, said the presentation outlines how the 2021 budget proposals are likely to affect government service delivery, economic recovery, the socio-economic situation and public finances. The two policy objectives of the budget are promoting economic recovery and returning public finances to a sustainable position. The Medium-term fiscal policy focus is on extending temporary support in response to COVID-19, narrowing the budget deficit and stabilising debt as a share of Gross Domestic Product (GDP), and exercising continued restraint in non-interest expenditure growth while improving the composition of expenditure

Dr Nelia Orlandi, Deputy Director: Public Policy, PBO, presented the budget’s response to the Presidential priorities announced in the State of the Nation Address (SONA) and the subsequent reprioritisation towards Presidential priorities. R1.3 billion has been allocated for vaccine purchases in 2021/22 in line with the priority to defeat the coronavirus pandemic. An additional R9 billion could be withdrawn from the contingency reserve for this. The net change in the health function is minus R8.8 billion. The economic development function has incurred a minus net change of R8.3 billion and the peace and security function a minus net change reduction of R23.9 billion. In line with the priority for economic reform, the general public service function has received an additional R32.6 billion, mainly for energy security.

She highlighted the spending priorities per budget function. Spending for the training and culture, health, community development, economic development and general public services have increased from the previous year. Spending on the social development function has significantly decreased from the previous year. Spending on debt-service costs is estimated to continually increase over the medium-term. The 2021/22 expenditure estimated mainly reverse some of the reprioritisation of allocations during the supplementary and adjustments budgets in 2020/21. The highest spending priority in terms of economic classification for the 2021/22 Medium Term Expenditure Framework (MTEF) is for transfers and subsidies, followed by the compensation of employees.

Structural reforms being considered are reductions in the wage bill, merging smaller departments with departments providing similar functions, and looking at preventing the trade-off between compensating employees and consultants.

Dr Seeraj Mohamed, Deputy Director: Economics, PBO, presented on the economic situation, highlighting the budget support for the ERRP and the potential impact of the budget and what else needs to be considered. He pointed out that the call for fiscal consolidation was raised with government for several years, however, government argued for contractionary expansion. This means lowering government debt in order to improve business confidence and investment. The last year has practically proved against this argument, and this has also been theoretically challenged in the past. The budget does not support growth during the MTEF, nor recovery and reconstruction. There is no stimulus to the economy or support to households, which leads to real term decreases in social spending. The budget does not strike a balance between immediate support for the economy and shoring up the country’s finances.

The budget focuses on supply side interventions and depends on the private sector to drive growth. Operation Vulindlela aims to increase business confidence, reduce the cost of business, ensure reliable energy supply and increasing government infrastructure spending. The contribution of public sector investment over the MTEF (as shown in slide 18 of the PBO’s presentation) will not have a very large impact on GDP growth in the MTEF. He pointed out that based on past trends of the Budget Review (BR) overestimating investment forecasts, the 2021 Budget Review may possibly overestimate investment growth for 2022 and 2023. Growth requires greater welfare and purchasing power of poor households. Demand side interventions that can be used in a mutually reinforcing way to boost aggregate demand are expansionary fiscal and monetary policy. The budget is focused on reducing expenditure and debt levels rather than providing immediate support for economic growth and adequate support for grants and services to households.

Lastly, he elaborated on the unemployment crisis and the search for job-creating economic growth, highlighting the negative changes in national employment.

Mr Rashaad Amra, Economic Analyst, PBO, presented the fiscal framework, highlighting budget balance, contributors to debt stabilisation and the contingent liabilities and risks. The growth outlook shows a smaller than anticipated contraction. The Fiscal outlook shows an estimated budget deficit of 12.3% in the BR, whereas the PBO predicts a 10.8% contraction. The 2021 BR debt service costs estimates are lower than those of the PBO. Estimates of debt as a share of GDP are relatively the same. The Gross borrowing requirement increased by R237.6 billion to R670.3 billion in 2020/21 as a result of Government’s response to the COVID-19 pandemic. Large and persistent increases in budget deficits – resulting in higher debt and debt-service costs – compromise the sustainability of the public finances.

Dr Jantjies presented the revenue trends, highlighting the tax proposals and tax developments. The 5 per cent increase in the personal income tax (PIT) bracket will not affect gross tax revenue, due to the tax revenue shortfall being recouped from indirect taxes. The increase in PIT bracket will largely provide relief to middle to lower income earners. The previously announced tax increase totalling to R40 billion over four years has been withdrawn to support households, businesses and the economy.  The Corporate Income Tax (CIT) will be lowered from 28 per cent to 27 per cent with effect from 1 April 2022.

Dr Jantjies said there is a lack of evidence that lowering the tax rate or tax relief is a major factor considered for investment. Despite the CIT of 28 per cent rate, the Effective Tax Rate (actual tax paid by corporate tax payers) is far lower (lower than 15 per cent) than the statutory rate.

(See presentation)

Discussion

Mr A Shaik Emam (NFP) said he was concerned that the President’s SONA did not mention the NHI. He asked what the impact of the budget cut to health will be. The human settlement development bank was established to enhance housing yet this was not mentioned. The Minister of Human Settlements said no new houses would be built instead fully serviced sites will be provided. However, the Minister is struggling to do so because of the poor performance of municipalities. What is the PBO’s take on this?

Government is talking about reducing the public wage bill on the one hand, and talking about creating 700 000 jobs in the public sector on the other hand. How can this be balanced? How does government plan on reducing the wage bill if it also continues to increase public sector jobs?  He added that even though jobs have been created, many more have been lost. Many companies are retrenching long-standing employees to employ new employees at a reduced cost. He warned that this is problematic. He asked the PBO to advise on what should happen in pushing for localisation and reducing the high cost of doing business in which small businesses suffer the most.

Dr Orlandi said the total reduction to the NHI is R349 million, which will have an impact on programmes, especially on the revitalisation programme. The grant had slow spending and slow performance so it made sense to reduce the revitalisation component. The PBO will soon have a briefing with Members that will cover the NHI grant. The reductions and reprioritisation of funds from conditional grants is from grants that did not perform historically.

Dr Mohamed replied that big companies can benefit from global aggregate demand growth, however small businesses depend on domestic demand, local manufacturing and household consumption. The nature of South Africa’s growth is currently dependent on household consumption and its quality in terms of bringing investment and creating jobs. Government’s support in boosting household consumption can help. The cost of doing business will go down with increased demand leading to incomes for small businesses and increased profitability.

Mr G Skosana (ANC) asked for commentary on the nominal increase in social grants. Is the slight increase in social grants, which is below inflation, helpful, given the fact that the social grant recipients now have more responsibilities such as taking care of family members who recently lost jobs?   

Dr Jantjies said the increase in social grants to households needs to at least take into account inflation. He agreed with the Member that given increase in employment more households will be under pressure. basically More support to households is needed to support both vulnerable societies and boost demand in the economy. The PBO can do a study looking at the impact of social relief on the socioeconomic situation and public finances in more detail. The PBO has done a study on social grants and it can be shared with Members, but the objective of this study was different to the current question.

Ms P Abraham (ANC) asked if operation Vulindlela can be seen as a form of economic reconstruction. She noted Treasury’s cry for other departments to lift their weight. Why does the reporting making use of nominal figures instead of real, knowing that the nominal figures do not give an accurate reflection of the reality? If contractionary expansion is not the answer, then what is?

Dr Mohamed replied that Treasury has used both nominal and real numbers in its analysis, however the use of nominal figures is official accounting practice and the standard of reporting. The other option besides contractionary expansion is expansionary expansion, in which government supports aggregate demand growth through a stimulus, social grant increases and helping the finances of poor households. This will increase business confidence and GDP, ultimately reducing the debt to GDP ratio.

Dr Orlandi explained that many of the objectives of operation Vulindlela are to fast track current projects, such as the procurement of additional electricity and the distribution of electricity. The switch to digital signal is another example.

Ms M Dikgale (ANC) said she was the concerned about the silence on addressing Gender Based Violence (GBV) and providing support to children and women, especially those who are unemployed and in rural areas. The matter was not addressed. She asked if there is any information that can be shared on this.

Dr Orlandi replied that the allocation to the Department of Women, Youth and Persons with disabilities has been reduced by R57.9 million. The PBO can do an analysis on how women have been covered across all the departments, such as the Department of Justice, Police and Social Development, as the issue around addressing GBV runs across multiple departments.  

Dr Mohamed said that women are at more of a disadvantage than men, and more should be done despite the mainstreamed efforts to address issues around women throughout government departments.

Mr Qayiso asked what the PBO thinks is the reason for energy not being prioritised. How did the expanded public works programme (EPWP) disappear? Is it no longer featured on the budget? Government has extended the social relief for an additional 3 months. Is there a reason why the increase cannot be made permanent? The PBO said it finds CIT being lower than 15% unusual, despite the increase in CIT. What was the PBO’s projection around CIT?

Dr Mohamed replied that social grants tend to have a high multiplier effect and so there should be some permanent improvement to some of the social grants. There has been a global trend of government’s issuing a basic income grant in response to the pandemic, such as in the United States of America (USA). This is due to recognition of the need to boost household consumption in order to drive business growth. The effective corporate tax is what companies actually end up paying and it could be lower than 15% despite the legislative rate of 28%.

Dr Jantjies added that with social relief, the focus should also be on creating more jobs, more investment and more support to businesses. 

Mr Z Mlenzana (ANC) asked for the PBO’s generic understanding of austerity. What are the implications of public sector investments declining and getting back to the 2017 figures? What are the implications of the increase in payments to consultants and decline to employees? What are the implications of the effective corporate tax rate on revenue generation?

Dr Jantjies said the issue of austerity is globally contested. In the current state of low economic growth, governments tend to do more to grow investment in order to boost economic growth. The increase in payments to consultants and decline to employees could potentially be taking away jobs through outsourcing. Government needs to reflect on which areas of employment have been affected to support the increased service for consulting. He pointed out that there need to be clear objectives in reforming the income tax regime. Even though the corporate tax rate may be 28%, the effective tax rate is lower at about 15%. The difference between the two is allowances and deductions that reduce the actual/effective tax rate below 28%. Government can reduce the expenditure that allows for these allowances so that it does not lose out on revenue.

Briefing by Finance and Fiscal Commission (FFC)

Professor Michael Sachs, Deputy Chairperson, FFC, shared opening remarks.

Mr Chen Tseng, Researcher, FFC, said the background of the 2021 Budget is a contracted economy that has been worsened by the COVID-19 pandemic. The pandemic came when the country was already facing persistent structural economic challenges of low growth, high unemployment and a narrowing tax base. Financial pressures and credit-rating weakness of contingent liabilities from State-Owned Enterprise's (SOE's) put further strain on the fiscus, resulting in fiscal credibility risk, and growing public debt. An economic overview of the past year shows rising domestic debt levels, primarily driven by public debt, negative impacts on employment and decreases in consumption and income growth.

The 2021 fiscus has adjusted for a significant estimated tax revenue shortfall of R132 billion, however, expenditure has only been adjusted by R23 billion. The Budget deficit for 2021/22 is R482.6 billion. Government has undertaken to narrow the deficit by aggressively reducing expenditure to sustainable levels while anticipating lost revenue to be recovered over the MTEF. The budget seeks to balance economic recovery and restoring public finances, and is in line with the four major Presidential Policy priorities. Tax revenue is projected to be far lower than originally projected. To avoid adding to the tax burden, the government has undertaken to withdraw the R40 billion proposed tax measures. The main tax proposals in the 2021 Budget include an above-inflation at 5% increase in personal income tax brackets and rebates to provide tax relief to specifically the taxpayers previously employed and paying taxes. The 8% increase in alcohol and tobacco excise duties should yield some revenue.

Lastly, Mr Chen elaborated on government’s tax proposals to support a greener economy.

Ms Sasha Peters, Programme Manager: National Budget Analysis Unit, FFC, presented on the 2021 Appropriation Bill, elaborating on the changes in appropriation by vote, and the FFC’s recommendations. Total allocation to national departments is projected to decline by 7.2% in 2021/22. The Social Development vote receives the largest share of the total appropriation vote at 22.1%. Allocations to the Social Development vote are set to decline by 14.4% in real terms in 2021/22. Whilst the FFC welcomes the relief provided by the extension of the special Covid-19 social relief of distress grant, it is of concern that total spending on social security grants is projected to decline by 6.2% per annum over the next three years. Social security grants provide critical income support to the poor and as such this projected cut will adversely affect this group. Allocations to the Basic Education vote are set to grow by 12.6% in real terms in 2021/22. Higher Education and Training is projected to see marginal growth over 3 years, followed by a decline. Cooperate Governance is projected to decline by 8%. Allocations to Health will grow by 4.4% in real terms in 2021/22, however, there will be real reductions for the rest of the MTEF period. Agriculture, Land Reform and Rural Development are expected to growth by 6.8% in real terms in 2021/22. Trade, Industry and Competition will receive an allocation of R9.7 billion as part of the ERRP. The Small Business Development vote will receive R2.9 billion over the MTEF. Tourism will receive a real increase of 63.9% from the previous year, due to increased transfers. Police and Defence allocations will decline over the MTEF, with reductions expected to largely be in respect of personnel. Justice and Constitutional Development will grow under 1% in 2021/22 and decline for the rest of the MTEF.

In its recommendations, the FFC calls for or departments to indicate to Parliament how they plan to absorb the cuts to their budgets and what might be foregone in terms of service delivery. Additionally, where departments have received additional allocations, they should indicate in terms of service delivery how this will improve economic recovery and reform and/or address the Covid-19 pandemic.

Mr Eddie Rakabe, Program Manager: Fiscal Policy Unit, FFC, presented Government’s Covid-19 response and the intergovernmental responsibilities and procurement issues. In response to the pandemic, National Government was generally responsible for economic relief measures while provinces and municipalities took control of health responses and only some social relief interventions such as temporary shelter for the homeless and delivery of water to schools. A special audit of Covid-19 responses by the Auditor-General shows that interventions at all government levels have been marred by maladministration, low take-up rates and slow spending, procurement irregularities and a lack of performance data.

The FFC welcomes the R10 billion allocation to provinces for Covid-19 response, however, it calls for better alignment of responsibilities for Covid-19 responses between national and subnational governments, as per the Constitution and well synchronised resource allocation and vaccination goals. There are concerns that the provincial equitable share (PES) formula does not respond to the unique needs of various provinces.

The Commission warned that the unprecedented budget cuts and reprioritisation over the past 5 years needs to be carefully managed through a coordinated and holistic process of expenditure review, rather than the current budget line item or sectoral approach. For instance, constant reprioritisation has had a negative impact on the Human Settlement Development grant since 2018. The Commission recommends that government provides parliament and provincial legislatures with regular reports on attainment of Covid-19 delivery targets. These reports should also detail the programs and projects affected that experienced cuts owing to the budget reprioritisation, and what the impact is on service delivery.

Ms Peters elaborated on the local government fiscal framework. She said although government provided R11 billion to relieve municipalities from Covid-19 related pressures, spending of such funds has been low. Municipalities have spent 40% of the R11 billion by February 2021. Covid-19 has amplified municipal debt, the challenges of access to basic services and the need for local government (LG) to work efficiently and be accountable. Major developments in local government for 2021 include the municipal elections, the rolling out of the District Development Model (DDM) and the review of the Local Government Capacity Building (LGCB) system. Total LG transfers will be reduced by R20.2 billion over the MTEF, with most of it coming from a reduction in the local government equitable share (LGES) allocations, which will negatively affect basic service delivery to the poor and vulnerable. The FFC appeals to municipalities to strengthen their revenue collection systems and to stop revenue leakages through harnessing new smart technologies. Conditional grants to municipalities will increase by 3% in real terms over the MTEF. The municipal conditional grants baseline will be cut by R2 billion as a result of underspending. Going forward service provision will be under severe pressure, including infrastructure and capacity building programs. Ms Sasha emphasised that underspending could be a result of bigger challenges that need to be investigated first before cuts are implemented. For instance, underspending during the pandemic could be due to the many restrictions and disruptions on businesses and municipalities.

Mr Thando Ngozo, Senior Researcher:  Macroeconomics and Public Finance Unit, FFC, elaborated on government debt and contingent liabilities, highlighting the debt and financing costs. He said the rising debt service costs are rapidly translating towards an unsustainable fiscal debt spiral. Contingent liabilities accounted for in the 2021 Budget amount to 22.5% of GDP. Government guarantees to state owned entities (SOEs) accounted for 54% of total contingent liabilities in 2020/21. Eskom remains a significant risk to South Africa’s debt sustainability and to the economy, as unreliable electricity supply continues to throttle economic activity. Government guarantees to SANRAL, the Trans-Caledon Tunnel Authority and South African Airways (SAA) are also relatively substantial. The SAA amended business rescue plan identified additional funding requirement amounting to R19.3 billion, of which R14 billion is expected to come from government, inclusive of the R10.5 billion allocated in 2020/21. The Land Bank defaulted on its debt in April 2020. It has been allocated R7 billion in recapitalisation over the medium term. Most SOEs are marred by governance failure evident in inefficiency, corruption, and financial mismanagement. There is no effective governance framework for SOEs to ensure transparency, accountability and improvements in the quality of SOEs' boards. Transet is the only state-owned company with a positive profit in the past 5 years.

Lastly, Mr Ngozo elaborated on public sector institutions and investment. He highlighted that there has been a decrease in public infrastructure investment from R236.2 billion in 2017/18 to R226.1 billion 2020/21, mainly due to a decrease in investment by SOEs. The FFC recommends an accelerated restructuring of SOEs and the improvement of governance in SOEs using a clearly defined governance framework.

In his concluding remarks, Prof Sachs said the central concern is that the FFC is not convinced that the 2021 budget is consistent with Constitution. The budget, as it stands, is a retrogression on the provisions of the Constitution that are central to the Bill of Rights. For instance, the Budget for central hospitals in 2021 has decreased in nominal terms compared to 2019. This means that less money will be spent on hospitals like Chris Hani Baragwanath and Groote Schuur will have, despite the constitution stating that “the state has an obligation to ensure a rising floor of access to health services. It also says “no one may be refused emergency medical treatment”, yet the budget for emergency medical services has decreased by R1 billion from 2019. The budgets are falling far below inflation and so an erosion in health services can be expected. The budget review mentions an increase in class sizes and will have a regressive impact on learning outcomes in basic education, especially no-fee schools. There are also cuts to social grants, despite the significant rise in hunger amongst children. Debt service costs are rising and crowding out space for provision of the above-mentioned services. He urged parliament to ask questions on whether the promise of the constitution can be realised and hold Ministers (of health, education and finance) accountable. As the government is negotiating for a sustainable fiscal path, it should not lose sight of the Constitutional imperatives nor lead to the retrogression of citizens' socio-economic rights.

Prof Sachs said that the current fiscal path of budget cuts will not lead to economic growth, but rather it is an attempt to stabilise debt.

(See presentation)

Discussion

Mr D Ryder (DA, Gauteng) suggested that SALGA be invited to talk about the decline in LG revenue collections in post-COVID South Africa. This analysis will help understand the sustainability of local government. He asked how realistic is the debt stabilisation projection trajectory given by NT?

Prof Sachs replied that no debt projection is reliable as it requires predicting what certain variables will be (such as economic growth, exchange rates or interest rates) into the future. We are living in unprecedented and uncertain times and so FFC cannot whether the projection is realistic or not. However, a major component of debt stabilisation is the balance between interest rates and economic growth. When the latter is higher than the former, it has a stabilising effect. Raising economic growth would be more effective in debt stabilisation than the current path of budget cuts.

Ms Abraham said the report mentions the problem is not just the equitable share formula but it is systemic. She asked what the FFC suggests should change with budgeting in order to address this. What are the FFC’s recommendations on resolving the unfunded mandates of LG?

Mr Tseng replied that the problem lies with conceptually distinguishing between the LGES, which is a vertical division, and the LGES formula, which is a horizontal division. The formula is not the issue; it is the equitable share.

Prof Sachs pointed out that the 2020 reprioritisation led to a R20 billion injection into the LGES, however this was a unique situation that most likely will not happen in the future due to the unprecedented circumstances in 2020. The general growth rate of the equitable share is concerning. The problem is not the division of the pie; the problem is the size of the pie itself - which is shrinking. The formula can do very little to prevent the rise of unfunded mandates if the pie continues to shrink. The issue of unfunded mandates is not only in LG, but also in the criminal justice system and the defence force faces the highest contractions.

Mr T Coetzee (FF+, Eastern Cape Provincial Legislature) requested that the submitted report be sent to Members of the Provincial Legislatures.

Mr Qayiso said the issue around the equitable share formula and system has been raised for 10 years now. Is it a challenge of recommendations being ignored? The presentation claims that the MTEF destabilizes provincial budgets and the budget proposal does not align with the constitution, what does the FFC practically propose?

Mr Tseng said the FFC notes that the budget review over 10 years has not made real changes in the equitable share issue.

Prof Sachs said that if the GDP per capita continues to decline, the state may be unable to sustain the constitution. Government has an obligation to address this issue when it presents the budget. This is the first time government has seen a significant decline in allocation to these basic services. Government needs to explain openly if there will be a retrogression on rights due to shrinking expenditure. The FFC is not proposing a solution, instead it is raising an issue of accountability on government’s choice.

Mr Qayiso assured Members that any outstanding questions will be responded to in writing by the FFC.

Closing remarks

Mr Maswanganyi, in closing, thanked the presenters and everyone in attendance

The meeting was adjourned.