2020 MTBPS: PBO & FFC Input

Meeting report

Chairperson Buthelezi welcomed everyone in attendance.

Briefing by Parliamentary Budget Office (PBO)
Dr Dumisani Jantjies, Deputy Director: Finance, PBO, stated that the 2020 MTBPS proposes steps to reduce the fiscal deficit and stabilise the debt- to-GDP ratio over a five-year period. This will be done by rebuilding the economy through the implementation of the Economic Reconstruction and Recovery Plan (ERRP), and improving the efficiency and composition of spending.  He pointed out that the MTBPS proposals are affected and dependent on uncertainties such as the negotiations to the public sector wage bill.

Dr Seeraj Mohamed, Deputy Director: Economics, PBO, presented Members with the macroeconomic overview and fiscal policy. Government’s fiscal objective is focused on quick rapid debt reduction, even though the pandemic is not over yet. The PBO was concerned that spending cuts in critical developmental areas, will reverse socio-economic gains, especially in a time of crisis. Expenditure cuts mean government is reducing the state’s role in the economy at a time when it is critical for the state to step up. He elaborated on the components of South Africa’s real Gross Domestic Product (GDP), highlighting the sharp decline in household in the first 2 quarters of 2020. As a result, aggregate demand will be under severe pressure due to the decline in household consumption as a result of loss of income and increased household debt to disposable income. He explained that the reason for the decline in real investment from 2016 to 2019 was the decline in public corporate investment. He elaborated on the credit extension investment, and on the performance of private investment and credit. He pointed out that Government debt is not crowding out private borrowing for investment (nor is household debt). 

Dr Mohamed highlighted the Central Bank Quantitative Easing (QE) activities of developed and developing countries during the pandemic. In general, the measures have reduced borrowing costs and risk of the countries. The South African Reserve Bank’s (SARB) purchase of South African sovereign bonds were too small to support financial liquidity but not government spending and debt. There is room for state entities such as the SARB and the Government Employees Pension Fund (GEPF) to increase South African government bonds in respective portfolios, to reduce and lower the risk on government debt.

Ms Mmapula Sekatane, Policy Analyst, PBO, presented the policy frameworks and plans. In its analysis, the PBO compared government’s Medium Term Strategic Framework (MTSF) to its ERRP priority interventions. The priorities of the ERRP are aligned to the economic transformations and job creation priority of the MTSF. She elaborated on the policy implementation over the medium term by highlighting the supplementary budget priorities and the MTBPS spending priorities. The MTBPS spending priorities consist of health, social development, peace and security, learning and culture, community development, economic development and general public services. South Africa’s public spending levels are not matched by high levels of quality or efficiency in the services delivered. Findings on spending reviews show several inefficiencies. For instance, many policies are designed and adopted without considering the total costs and affordability. Also, policies such as the National Health Insurance (NHI) and the District Development Model (DDM) depend on outstanding interventions.

The current year revisions to the policy frameworks were based on the fiscal impact of COVID-19, necessitating support to State-Owned Entities (SOEs) and local government (LG). However, the revisions to the Medium Term Expenditure Framework (MTEF) are based on stabilizing debt and reducing the budget balance. For instance, revisions include reducing non-interest spending, mainly in the compensation of employees (COE).

Mr Rashaad Amra, Economic Analyst, PBO, presented the revised fiscal framework, debt outlook, revenue and expenditure. The PBO calculated a further deterioration in the main budget deficit than what is in the 2020 MTBPS. This was primarily from the COVID pandemic and its implications for global growth over time, but also the effects on the South African economy attributed to the lockdown measures put in place reduce the spread of the virus.

Mr Amra elaborated on the contribution of the change in nominal GDP, revenue and expenditure on the change in the budget balance. The largest contributor being the significant decline in revenue. MTBPS forecasts increasing debt and debt service expenditure, which adds to the continuous challenge of fiscal slippage affecting credibility. Over the past few years, gross debt as a share of GDP has risen. Higher indebtedness and borrowing has increased the cost of further slippage. Risks in the fiscal framework include weaker economic recovery, wage bill pressures and the budget reductions impacting service delivery and growth.
He highlighted that there is a gap between the country’s fiscal objectives and what is achieved. This has resulted in concerns around the credibility of the fiscal framework. For effective fiscal oversight, lawmakers need to interrogate the implications and the credibility of the tabled money bills. For instance, the MTEF guideline calling for 0% increase in public wages over the medium term is not entirely in government’s control because it requires negotiations.

Dr Jantjies presented the discussions around revenue. The MTBPS calls for additional measures amounting to R40 billion over the medium term. Some policy proposals in the MTBPS may worsen tax revenue collection if implemented, for example the impact on Personal Income Tax (PIT) and Value Added Tax (VAT) as a result of the reduction in the public sector wage bill. He elaborated on factors that need to be taken into account with the reduction in the compensation of employees (COE), such as the impact on service delivery and government’s policy to attract high skilled professionals. It is generally recognized that public sector tends to offer greater job security than the private sector, yielding a steady stream of PIT revenue. In times of austerity, the tendency to impose policies directly aimed at reducing the public sector workforce size or capping pay can have a disproportionate effect on the PIT tax base.

Dr Nelia Orlandi, Deputy Director: Public Police, PBO, presented the discussions around expenditure. She elaborated on the revisions to the 2020/21 non-interest expenditure, highlighting that non interest-expenditure increased in the MTBPS compared to the 2020 Budget Review. In recent years there has been declining capital expenditure, and the sharp decrease in public infrastructure investment has been attributed to declines in spending by state-owned companies (SOCs).

Dr Orlandi elaborated on the revisions to the 2020/21 consolidated expenditure, in which compensation accounts for about half of the reductions. She highlighted the changes to the proportions allocated per budget functions and per economic function. Lastly she presented Members with the real per capita expenditure on education and economic development

Ms Fatsani Banda, Economic Analyst, PBO, presented the fiscal consolidation and implications of the downward pressure on the public sector wage bill. The large reductions in the compensations of public employees is justified by the explanation that expenditure on compensation has increased.  However, the share of COE in total expenditure has declined from 38% in 2000/01 to 33.9% in 2019/20. Over the MTEF period, all departments will be required to control wages & headcounts, whilst minimising the effects on frontline services. The biggest compensation reductions are in learning and culture, health and peace and security. Government proposes growth in the public-service wage bill of 1.8% in the current year and average annual growth of 0.8% over the 2021 MTEF period. Broad sweeping cuts to the public sector wage bill may lead to clashes with public sector unions, affecting the current wage agreement and upcoming wage talks. She highlighted some concerns raised by the goals in the MTBPS to quickly reduce debt and achieve a surplus, such as whether the plan to leverage infrastructure investment will be enough at a time when the private sector may be unwilling to make long-term investments. Also the impact of the large expenditure cuts during an ongoing health and economic crises. 

(See Presentation)

Briefing by Financial and Fiscal Commission (FFC)
Professor Michael Sachs, Deputy Chairperson, FFC, stated that during uncertain times, the near-term becomes the concern over the medium-term. He urged Members of Parliament to focus to a great extent on next year's budget and its numbers, as it will be a critical year. The Commission welcomes the easing of the fiscal consolidation path proposed by the Minister compared to the special adjustment budget. The debt stabilization is now to be achieved over five years instead of three years. Next year's budget cuts are eye-watering because the nominal level of expenditure cuts are unprecedented in South Africa. For instance, the Department of Home Affairs (DHA) and Department of Defence (DOD) will see budget cuts of 13.5% and 9.3% respectively, in the coming year. The MTBPS states that basic education will have a 0% increase in its budget next year and is hoping public servants will agree to a 0% increase in salaries. The costs of services such as electricity will be increasing, however, the budget remains the same. He warned that this will lead to a real erosion in the quality of services provided to South Africans who depend on public education. It only leaves the department of education with the option of reducing school staff due to budgetary pressures.  In addition to the impact on core government services, another area of concern is the realistic impact of the reduction on the local government equitable share (LGES).

Mr Chen Tseng, Researcher, FFC, presented on the 2001-2020 macroeconomic performance, highlighting the sharp decrease in GDP, the stability of inflation and the decline in the unemployment rate due to a significant increase in the economically inactive population. The fiscal performance analysis shows that the debt-to-GDP ratio will increase substantially, and debt-service costs will rise. Treasury hopes that despite the 7.8% contraction in GDP, the economy will recover quickly to achieve 3.3.% growth next year. Government’s macroeconomic forecasts are generally over-optimistic as seen with the budget review, supplementary review and MTBPS. The Commission is of the view that instead of taking an overly ambitious fiscal policy position (i.e. zero-based budgeting), it should take a more practical public finance management approach. The costing and pricing of functions to align public finance and outputs to outcome. As part of the ERRP, the focus areas of growth are infrastructure, expanding energy generation capacity, creating mass public employment and supporting rapid industrialization. Although the FFC appreciates the government’s recovery plan to be strengthening the continuity and consistency of the position taken, however, consistency should not be confused with repetitions without proof of real reforms, impacts and outcomes. The Commission believes the Ministers of finance, of economic development and trade & industry, and of labour should jointly address the economic barriers, social inequality, and societal polarisation by adopting a localised product value chain approach.

Dr Mkhululi Ncube, Programme Manager: Local Government Unit, FFC, presented the fiscal framework by comparing the Special Adjustments budget to the 2020 MTBPS. The MTBPS’ revenue projections for 2021/22 are lower by R4.6 billion and debt service costs are higher and continue to crowd out other forms of spending. The burden of this is being pushed to provinces and municipalities. He also elaborated on the analysis of growth rates, the division of revenue among the spheres and the budget allocations by functional classification. He highlighted that broad cuts will affect all three spheres of government in 2021/22, with large real cuts to provincial equitable share (PES) and LGES. The Commission is concerned about lack of adjustment/decreases to Basic Education, Agriculture, Defence and Social Security Funds envisaged for 2021/22, especially the implications of no increases in basic education.

Dr Ncube also presented the local government fiscal framework, highlighting the local government allocations, growth rates and baseline reductions to conditional grants. The LGES will decrease by 9% in 2021/22 and it unclear how LG will maintain services to poor households.

Mr Eddie Rakabe, Programme Manager: Fiscal Policy Unit, FFC, presented the fiscal risks underlying economic recovery, a review of the COVID-19 relief package and the alignment of the budget to economic policy interventions. The massive growth in average remuneration of public servants and represents a risk to the stabilisation of fiscal and public debt metrics. The MTBPS wage freeze proposal comprises a reduction of R36.5 billion in 2020/21, R274 billion over the 2021 MTEF period and R310.6 billion over a four-year period. The success or failure of the fiscal consolidation, and by extension public debt stabilisation, hinges on the ability of government to implement the wage freeze. The Commission questions how practical the wage freeze proposal is. Government guarantees to SOEs increased from R470 billion in 2017/18 to R484 billion in 2019/20, because of SOE underperformance, in particular Eskom, and represents risk to debt sustainability and public finances. The FFC recommends the speedy establishment of the proposed Presidential State Owned Enterprises Council whose task is to provide strategic oversight of SOEs. Regarding the alignment of the budget to economic policy interventions, departments like agriculture and rural development, defence and state security, home affairs, education or police will experience no growth or negative growth. Either these departments will cut on service delivery or discontinue some services they are mandated to provide. The question is: How will departments manage such cuts and which aspects of service delivery will be affected.

Lastly, Mr Rakabe elaborated on the feasibility of implementing Zero Based Budgeting (ZBB). He stated that ZBB is able to reduce program inefficiencies if well implemented. However, it has multiple implementation risks and challenges. Government should rather institutionalise some aspects of ZBB, like mandatory periodic program reviews.

(See Presentation)

Discussion
Mr F Shivambu (EFF) stated that any budget based on the premise of reducing or freezing the public wage bill is illusionary. Any form of budgeting must always factor in an increase in public servants’ salaries. If the salaries are not increased then government is making its public servants poorer, which Parliament will not agree to. He asked the FFC if localisation of procurement should be elevated to a legislative instrument. For instance, an amendment to the Public Finance Management Act (PFMA) making it compulsory for all government procurement to be locally made. The current system of voluntary localisation is not being adhered to. He added that a growing number of municipalities owe Eskom and the water boards. Can the budgets of these municipalities be top-sliced, by deducting the money due to Eskom and the water boards instead of giving the municipalities the full amount? Are the budget cuts not an austerity measure that will shrink the economy and the revenue base of the state? He stated that austerity measures in response to crisis have never worked in other economies.

Dr Mohamed replied that austerity can be defined in different ways. One is whether government is cutting spending or is spending inadequately. It can be argued that government has shown austerity-type budgeting in the past and even now during the pandemic with the sharp cuts. it can be considered austerity

Dr Orlandi stated that the Procurement Bill does provide for localisation, however, this is still under discussion and an updated draft of the bill still needs to be tabled in Parliament. 

Prof Sachs replied that the challenge with austerity is that it means different things to different people. Instead, the concern is the impact of the MTBPS on growth over the medium-term. If it is negative, then the expenditure cuts would lead to growth falling and a deviation from the target primary balance. On page 15 of the MTBPS, Treasury gives an economic forecast of government expenditure contracting by 2.5%, a rebound in household consumption and growth in net exports. It assumes the last two forecasts will offset the contraction in government spending. The question is not whether austerity works or not. The question is whether the scenarios in the MTBPS are plausible and what are the risks of alternative scenarios. A contraction in government spending will have a negative impact on aggregate demand. The concern is whether household consumption will increase enough to offset this effect.

Dr Ncube stated that the FFC shares the same sentiments about the growing debt to Eskom and water boards. However, he cautioned that top-slicing can be done as a last resort as it can have unintended consequences, especially for the most vulnerable. Government needs to identify the cause of the growing debt and look at what measures can be taken.

Mr Du Toit (FF+, North West) asked if investor uncertainty from expropriation without compensation and service delivery protests, could contribute to a fiscal slippage. When might there be a rise in inflation in the economy?

Dr Mohamed explained that inflation occurs when there is pressure on prices due to a shortage of supply.
Currently, global demand is low and there is an oversupply in many areas, for instance the oil price decreased in response to the shutdowns. Several institutions do not foresee substantial price increases in the medium term. Some specific goods might see price increases but the possibility of aggregate inflation is low.

Mr Amra replied that fiscal slippage is a function of economic growth, revenue collection, expenditure management and other factors. Any factor that harms economic growth impacts on slippage, such as the mentioned poor management of municipalities and energy supply issues. Investment climate is a factor as well. The bailouts of SOEs in recent years has been a contributor to slippage in recent years.

Mr X Qayiso (ANC) stated that there will be a problem if Treasury refuses to provide the necessary data and suggested that it provide the performance data. He suggested that the issues of public wages be referred back to the Public Service Co-ordinating Bargaining Council (PSCBC). Why is the MTBPS silent on the District Development Model (DDM)?

Dr Orlandi stated that the PBO is happy that Treasury now acknowledges the need to implement a programme and performance budgeting system (PPBS). Performance information is settled in the Department of Planning, Monitoring and Evaluation (DPME), however it takes long to produce performance reviews. Ultimately the performance reviews are not featured in the budgets. A lot of things still need to happen before the DDM can be implemented.  Blockages have been identified such as poor public and stakeholder engagement.

Mr Tseng stated that the credibility of forecasting the fiscal target is important because once it is lost, it has a significant impact. Over the past years, there has been optimism pushing the forecast to be higher than what it should be, and this hinders the accuracy of forecasts. He urged the Committee to use its legislative tools and ask questions around the impact of the forecasts, especially around the localised product value chain and the costing and pricing. The FFC has not had access to data on costing output and impact for the past 20 years.

Mr A Shaik Emam (NFP) asked if the PBO and FFC believe that what was presented by the Minister of Finance is achievable or not. He did not think it was achievable and proposed focusing on clamping wasteful expenditure in the procurement process. The amendment in the procurement bill is not enough to deal with this issue. He added that government should strengthen municipalities to become self-sufficient.
What impact will the increase in costs and lack of increase in allocation to Education, have on the already high first year drop-out rate in tertiary institutions?

Prof Sachs replied that the central problem with the MTBS is on page 36, which is the lack of policy decisions to back-up the fiscal choices set out in the MTBPS. For instance, has the 9% reduction in the Defence budget been backed-up by policy decisions such as withdrawing deployments from the Democratic Republic of Congo (DRC)? If no policy decision has been made, then it will weaken the Defence Force. This applies to all departments and the delivery of services. It results in the burden of adjustment being imposed on those least able to resist. In health and education, the recipients of the services would the least able to resist.

Prof Lourens Erasmus, Commissioner, FFC, agreed that the procurement process and localisation need to be looked at. Structural reform in these areas need to be prioritised.

Mr D Joseph (DA) asked if the FFC or PBO has done a breakdown of the R10.5 billion allocation to South African Airways (SAA). If so, he requested that this be shared with Members to find out what exactly the money will be used for. The Minister announced that there will be an increase in taxes of R5 billion next year and R10 billion the year after. Where can this money come from?  He expressed concern with the reduction to local government and the increase to state guarantees. Why do the PBO and FFC have a more negative view of ZBB?

Dr Jantjies replied that government has not mentioned specifically where the R5 billion tax will come from. National Treasury (NT) stated that it is has no plans to impose new taxes, however, it is looking at limiting the inflation adjustments of tax brackets. Regarding ZBB, the PBO has stated that wastage in public spending must be dealt with in a more strategic way. The PBO has tried to show that there are pros and cons to ZBB based on the experiences of other countries, to explore if there are other better approaches.

Dr Orlandi stated that the only indication of where the SAA money is going is that R6.4 billion is going towards the settlement of the government currency debt. R10.5 billion is for the implementation of the business recuse plan.  

Prof Erasmus said the FFC agrees that ZBB eliminates inefficiencies. However, it is concerned with its implementation because it was abandoned in 2005 due to how time-consuming and complex it is. There was also the lack of capacity and motivation of workers, which is essential for accuracy.

Chairperson Maswanganyi expressed concerned about the money allocated to SAA, as It is now eroding resources for services to local government. He agreed with Mr Joseph’s request for a breakdown and the rationale behind the allocation.

Ms D Peters (ANC) pointed out that slide 29 of the PBO’s presentation indicates a decrease in the health budget.  What is the PBO’s view of the implementation of the NHI given the decrease in budget to health? Is the PBO saying that the budget is enough to pay debt and compensate public servants?

She asked the FFC how the President’s announcement of employing 300 000 teacher assistants, and the 800 000 employment opportunities, impacts the public service wage bill? What prevents South Africa from supporting locally produced products? She suggested that a special discussion be held on how to get SOEs to be self-sufficient, and questioned the fairness of sustaining SOEs to keep certain jobs.

Mr Amra stated that debt service costs are directly charged against the National Revenue Fund (NRF). This means that it is not an appropriated allocation and works similar to a debit order. On the other hand, the compensation of employees is appropriated, therefore treated differently. The extent to which the country can afford it is the key concern.

Dr Mohamed stated that SOEs should be seen as having a bigger economic role than entities that are bailed out to keep employment. Especially SOEs like Eskom and those that provide essential goods. The state requires electricity to function, hence helping in the recovery of the entity. The issues around SOEs are long-standing issues that go beyond state capture. The country is now paying for an issue that was not dealt with over the past 20-25 years in how Eskom was poorly managed.

Dr Orlandi explained that there are blockages that need to be dealt with before implementing the NHI. Additionally, the NHI grant has been reduced by R70 million. There is no way to implement it in the given time frame if reductions or adjustments continue.

Mr Rakabe replied that the Minister had announced that R100 billion will go towards the employment initiative. However, it has not been clarified if that R100 billion will be set aside for the teaching programme positions. The concern with this initiative is that it takes place outside of the public bargaining process, and over time the temporary employees tend to demand to be absorbed into the public sector. The public wage bill will then be affected.

Mr Shivambu proposed that SAA be called in to account for what it has used previous monies for and what is the plan for the R10.5 billion.

Mr Qayiso stated the R440 million cut in the equitable share, should not have been the starting point as it would cripple local government.

Mr Shaik Emam asked the FFC and PBO for their understanding on the DDM. The President announced that government will be employing 800 000 people yet it is reducing the public wage bill. What does this mean?

Dr Ncube explained that the DDM is a regional development model that seeks to exploit economies of scale. It moves away from silo development and encourages regional development within the 44 district municipalities and 8 metros. It moves for coherence and coordinated planning in government service delivery and infrastructure delivery. The model needs to be adequately resourced and there needs to be clarity on its operations before it can contribute to economic recovery.

Mr A Sarupen (DA) stated that in slide 37 of the PBO’s presentation, it questions how the wage freezes will affect the performance of the public sector, whereas in slide 23 of the FFC’s presentation it questions the feasibility of the wage freeze. These are contradictory opinions. On what basis has the PBO modelled aggregate demand in relation to the public sector wage bill. Given that 23% of the country’s employees are in the public sector, how did the PBO come to the decision that it is not in favour of the public wage bill cuts?

Dr Mohamed replied that there is no disagreement between the FFC and PBO on the wage bill. Both agree that what is happening is undermining the PSCBC and could raise problems. Even though the PBO’s conclusion is in the form of a question, overall, it is about questioning the credibility of the figures in the MTBPS. Public sector wage bill and aggregate demand – public sector workers somewhat play the role of a fiscal cushion given that public sector jobs are relatively more secure than other sectors. Therefore, an impact on aggregate demand is seen when public wages are cut. 

Mr E Njadu (ANC, Western Cape) requested more details on the implications of budget cuts to major departments such as education, and three recommendations from both the FFC and PBO on this issue.

Chairperson Buthelezi requested the PBO and FFC to comment on the target for a surplus by 2025/6. What are the implications of this target? Does the Public Procurement Bill help localise procurement? He noted that the FFC is against cuts and asked what are other sources of funding to be considered? What is PBO’s and FFC’s comment on the South African Reserve Bank (SARB) being involved in the primary and secondary bond market?

Prof Sachs noted that all the countries engaged in central bank quantitative easing have had falling government debt over the last 20 years, such as Indonesia and the Philippines. The exception is Chile due to the nature of its quantitative easing programme, which involved the central bank buying corporate bonds instead of government bonds. Chile has seen a rise in its debt. The outcome of moving in this direction is unknown because of the current unprecedented times. It could go well or bring in financial instability and decline the value of the rand, which is the risk of having aggressive central bank involvement.

Dr Jantjies stated that government has not been able to obtain fiscal targets in the past. It will have to do more to achieve its fiscal objectives in the future. The PBO will respond to the Chairperson’s question on the primary balance in writing.

Dr Mohamed stated that there is a lack of discussion on the bailouts being 10% of GDP yet the SARB’s work to stabilise the financial markets is less than 1% of GDP. Government should be considering private flows.
He suggested that other state agencies, in addition to the SARB, increase fund raising from asset buying activity by 1 or 2% of GDP. This will significantly reduce the risks associated with paying back public debt. He stated that his concerns with the financial health of the country are much greater than the concerns with the SARB buying back government bonds.

Dr D George (DA) pointed out that the PBO mentioned private sector debt is not being crowded out by the increase in public sector debt. Has the PBO done any work on private sector debt and what is it actually doing?

Dr Mohamed replied that a lot of corporations have taken on large amounts of debt since 2015, however, there is declining investment. The debt funds could be going to operational costs, however there is a trend of the funds going towards share buy-backs, high bonuses, increased dividend pay-outs and so forth. 

Mr G Hill-Lewis (DA) stated that this Committee is not just an oversight Committee and highlighted that if all members are against the bailout to SAA, the Committee has the power to reject it.

Ms D Mahlangu (ANC, Mpumalanga) stated that she was dissatisfied with the state of municipalities after performing oversight issues. She agreed with Mr Qayiso that the wage bill should be left with the relevant structures to deal with it, however, the Committee should express its sentiments of disapproval.

Chairperson Buthelezi requested that an addition to the breakdown of the SAA allocation, that information on the implications of the debt guarantee be given as well.

The meeting was adjourned.