2020 Budget: Parliamentary Budget Office & Financial and Fiscal Commission briefings

Meeting report

Mr S Buthelezi (ANC, co-chairperson) welcomed members of the finance committees of some of the provincial legislatures to the meeting.

Briefing by the Parliamentary Budget Office (PBO)

Policy Priorities

Ms Nelia Orlandi, Deputy Director: Public Policy, PBO, said the policy priorities in the budget were:

• To strengthen the macroeconomic framework to deliver certainty, transparency and lower borrowing costs;
• To focus spending on education, health and social development;
• To modernise “network industries” and restructure state owned enterprises SOEs);
• To open markets to trade with the rest of the continent;
• To implement a re-imagined industrial strategy;
• To lower the cost of doing business;
• To focus on job creating sectors, such as agriculture and tourism;

Ms Orlandi said specific priorities and projects announced in the State of the Nation Address (SONA) were still in the planning stage therefore were not funded in the current Medium Term Expenditure Framework (MTEF). A Budget Priorities Framework, or Mandate Paper was currently under review and needed to be aligned with the SONA priorities.

Economic situation

Dr Seeraj Mohamed, Deputy Director: Economics, PBO, said the macroeconomic approach of the budget was too narrowly focused on the supply side of the economy.

The speed at which an economy could grow depended largely on improving aggregate demand.

Reducing the cost of doing business would be effective only if businesses had adequate demand for their products.

The proposed expenditure cuts of R261 billion did not point a way to stimulating growth, investment and employment over the medium term. The budget did not provide plans for responding to global risks

Dr Seeraj said governments worldwide now favourably considered fiscal policy to boost demand. The South African government could make targeted fiscal choices to boost aggregate demand, particularly consumption by poor households. 

Fiscal framework

Mr Rashaad Amra, Economic Analyst, PBO, said there had been a large downward revision in the budget balance. The consolidated deficit was now 6.8 % of GDP. While stabilising debt was the stated policy, the budget made it clear that this would not be achieved over the medium term.

Revenue trends

Dr Dumisani Jantjies, Deputy Director: Finance, PBO, said there had been a 9 % downward revision in revenue projections from the 2019 Budget.

Revenue proposals included restricting the use of assessed losses and interest deductions to reduce company tax. Although the statutory tax rate for companies was 28 percent, incentives, allowances and deductions meant that the effective rate was between 10 and 12 percent.

There was personal income tax relief. In addition, the cap on the exemption of foreign remuneration of tax residents would be increased to R1.25 million.

Dr Jantjies said clarity was required on South Africa’s approach to taxing profits in the digital economy.

Expenditure trends

Ms Orlandi said spending on debt service costs was projected to grow by an average of 12 percent a year over the MTEF period. Expenditure in all other budget categories would grow at a slower rate than envisaged a year earlier.  Baseline allocations over the MTEF would be cut by R261 billion. Of this, R101 billion would be cut from government programmes. Compensation of employees would be cut by R160 billion. A total of R111 billion would be reallocated. State owned enterprises would get R60 billion with R33 billion going to Eskom and almost R10 billion to SAA.

Ms Orlandi outlined risks for the budget:

• Lower than expected economic growth could lead to lower than projected revenue collection;
• It depended on renegotiation of public service wage agreements;
• Insufficient progress on Eskom reforms and demands from other financially distressed SOEs;
• Contingent liabilities arising from Road Accident Fund (RAF) would increase to R600 billion over the medium term, making the RAF the largest contingent liability. A Road Accident Benefit Scheme Bill which was tabled in Parliament in 2017 was waiting to be processed;
• Clarity was needed on the government’s position on the user pay principle as it related to e-tolls;
• Integrated planning, budgeting, monitoring and evaluation was still a challenge in ensuring effective and efficient expenditure.

Briefing by the Financial and Fiscal Commission (FFC)

Prof Daniel Plaatjies, Chairperson, FFC, said there was a need to unravel a “gridlock” between the state, market, industries and society. Part of the gridlock was the result of increasing unemployment and slow growth in GDP. Policy uncertainty was also a contributor. There was a need to respond quickly to climate change and changes in population and migration patterns.

Economic outlook

Mr John Kruger, Head of Research, FFC, said the great recession of 2008 had been followed by a “great deceleration” of slowing growth and a “relentless uptick” in unemployment. Gross debt to GDP ratios had worsened dramatically and debt services costs had risen to 18 percent of main budget revenue.

However, there were “better stories” to tell about what had been achieved over the past 25 years. Figures from the National Income Dynamics Study showed a decrease in poverty levels between 2008 and 2017. The proportion of chronically poor people declined from 52 to 42 percent.

There were also improved outlooks in two key sectors, education and health. Internationally recognised tests showed that maths and reading skills were improving at a good rate. Life expectancy had increased from 55.9 years in 2002 to 64.7 years in 2019. There had been a dramatic decrease in infant mortality.

Budget strategy

Mr Kruger said the government's economic strategy aimed at stable macroeconomic policy and fiscal consolidation. It aimed to reduce the cost of doing business through regulatory efficiency and by providing policy certainty. It aimed to boost exports and labour intensive sectors.

IN the FFC’s view, policy uncertainty arose from the balance of power between winners and losers in society. Policies that were positive for some might be negative for others who would resist them. Inequality remained exceptionally high. This affected social cohesion and respect for the “rules of the game.” There was a need to create a stakeholder society where people who were negatively affected could be protected by, for example, a sovereign wealth fund.

Fiscal framework

Mr Kruger said urgent action was needed to deal with a weakening fiscal framework. The composition of government expenditure was weakening with the tax to GDP ratio now at 26.3 percent. This had an impact on investor perceptions and confidence and increased the cost of borrowing.

The government’s strategy was to cut back on expenditure and bargain on a return of confidence. The Division of Revenue between spheres of government showed some real growth in transfers to provinces and local government. National allocations were erratic because financial support to SOEs would decline over the MTEF period.

There were reduced allocations for the peace and security, and general public services sectors. Debt service costs were the fastest growing item.

Revenue initiatives included:

• Strengthening the SA Revenue Service (SARS);
• Broadening the tax base and eliminating incentives and deductions where possible;
• Moving forward on taxing the digital economy which was under-taxed at present;
• Mr Kruger said questions had been raised about the proposal to cut the public service wage bill:
• Could the wage agreement be successfully renegotiated?
• Could an agreement be effectively implemented without unintended consequences such as the emigration of the best teachers and nurses?
• Was the strategy fair to civil servants such as teachers, nurses, prosecutors, social workers and police? Were there alternatives which would shift the costs of consolidation to a broader social pact?

Discussion

Ms P Abraham (ANC) commented that the FFC had “found a way of making us all feel good” with the information it had supplied on improved poverty and life expectancy statistics. She asked whether the 2020 Budget provided enough demand-side intervention to stimulate the economy. 

Mr A Sarupen (DA) expressed concern about the adjustments to spending. Was the civil service budget being cut to bail out SOEs? On taxing the digital economy, he said digital products were already subject to VAT. What other taxes were being considered?   

Mr D Ryder (DA) said doubt was already being cast on the government's economic growth forecast. There was resistance to the proposed wage bill cut. There was a lack of trust in the undertakings given by the government. A report by Eskom’s Chief Restructuring Officer had not been released. There were repeated promises about an auction of broadband spectrum, but nothing was happening. The government needed to provide specific dates and deadlines for its actions.

Mr Ryder recalled Prof Plaatjies had, at a previous meeting, expressed dissatisfaction about the way in which the entity’s recommendations were received by the National Treasury. Had there been any improvement in their interactions? The FFC had called for more funding for local government, but grants had been reduced.   

Ms M Mohlala (EFF) said she was concerned about proposals to reduce the public sector wage bill and about the way in which this might be done. The FFC had said government policies were having some positive outcomes, yet the health system was collapsing. What barometers was the FFC using? 

Ms D Peters (ANC) said Parliament should examine whether its oversight mechanisms were delivering results. It should consider how it could track reactions to recommendations and reports made by its committees. She commented that too many people were still living in chronic poverty.

Ms D Mahlangu (ANC; co-chairperson) agreed on the need for a mechanism to track what became of parliamentary resolutions.

Mr S Buthelezi (ANC co-chairperson) asked whether the emphasis of the 2020 Budget was expansionary or contractionary. Agriculture and Tourism had been identified as growth sectors. What resources had been allocated to them? He commented that, while much was said about creating jobs, very little was said about protecting existing jobs. 

In response to questions about macroeconomic policy, Dr Mohamed said there was a major discussion internationally about whether monetary policy had reached its limits. There was a growing view that countries should focus more on increased expenditure to provide a fiscal stimulus to economic growth.

On taxing the digital economy, Dr Jantjies said a physical presence test had historically been applied in determining tax liability. That model no longer worked and new ways of taxing global digital trade had to be found.

On whether the 2020 Budget was contractionary or expansionary, he said the Budget Review acknowledged that spending cuts would have some negative effects, but there would also be positive effects from interventions in specific economic sectors. The PBO view was that fiscal consolidation in past years had had a contractionary impact.

Ms Orlandi said the PBO had been told by the Department of Planning, Monitoring and Evaluation that the next Medium Term Expenditure Framework would focus on the priorities listed by the President in his State of the Nation Address.

On the composition of the public service wage bill, she said Parliament’s Standing Committee on Appropriations had in 2019 asked the National Treasury and the Department of Labour do a comprehensive study on the public sector wage bill at all levels of government including State-owned companies and municipalities in order to determine the exact impact of aggregate wages in government. National Treasury would present a report to the committee before the Medium Term Budget Policy Statement (MTBPS) was tabled in October.

On adjustments to expenditure, Ms Orlandi said some of the reductions that had been made were based on slow spending performance.

Professor Plaatjies said the FFC’s role was not to prescribe to the government but to provide information on the effects of government policy. At a consolidated level, government social and economic policy had indeed contributed to better education outcomes and increased life expectancy.  

Prof Plaaijies said policy uncertainty on issues like e-tolls did not originate only within the government. Policies were challenged in court and there were tensions between different sectors of society. Ways had to be found to reduce the gridlock between the state, the markets, industry and civil society.

On relations with the National Treasury, he said the FFC made its recommendations to the whole of government, including the provinces. Its recommendations would carry more weight if they were backed by Parliament. There should perhaps be a mechanism to make clear whether Parliament and the provinces agreed with them.

Mr Kruger said he agreed with comments about the extent of poverty and continuing service delivery problems. Things were still bad but the situation had improved in some areas.

ON whether the budget was expansionary or contractionary, he said the government had in the past made fiscal choices that cost the country dearly. At best, the current budget was neutral.

To comments about a lack of trust in government promises, he responded that increasing numbers of priorities and deadlines meant that civil servants found themselves in a “priority thicket” which was difficult to manage.

On digital taxes, people who made money in the country and used its infrastructure should pay. their share of taxes.

In closing the meeting, Mr Buthelezi said inequality led to conflict in societies and discouraged investment. There was an economic rationale for taking a stand against inequality.

The meeting was adjourned.