Pre-Budget briefing by Parliamentary Budget Office

Meeting report

The Standing and Select Committees on Finance received a briefing from the Parliamentary Budget Office (PBO) on economic and budgetary issues ahead of the tabling of the annual Budget by the Minister of Finance.

It was announced at the start of the meeting that the Chairpersons of both Committees were unable to attend due to reasons beyond their control. Ms P Abraham (ANC) was unanimously elected as the acting Chairperson. She invited the PBO to make a presentation.

Pre-Budget briefing

Ms Nelia Orlandi, Deputy Director, PBO, said the President's State of the Nation Address (SONA) provided the strategic direction for planning and budgeting. The government was responding to challenges in:

• Transport, by fixing the commuter rail system;
• Skills development, by building technical and vocation education and training (TVET) colleges and a University of Science and Innovation in Ekurhuleni;
• Job creation and security, through the development of master plans for the automotive, clothing and textiles, poultry, sugar and steel industries;
• Youth unemployment;
• Crime, by establishing a crime detection university at Hammanskraal; and
• Electricity supply, by enabling municipalities to procure their own power from independent power producers (IPPs).

Other initiatives were to establish a sovereign wealth fund and a state bank.

Initiatives already under way included the National Health Insurance (NHI) plan, which was intended to address inequity, high costs and inefficiency in the current two-tier healthcare system. At present, the public sector provided health care for 80 percent of the population and accounted for approximately 48 percent of total health care spending. The private sector provided health care for 20 percent of the population, and accounted for approximately 50 percent of total health care spending.

There was also a water and sanitation master plan to address the fact that more than three million people still did not have access to a basic water supply service. In addition, 14.1 million people did not have access to safe sanitation. Forty-one percent of municipal water did not generate revenue, and 35 percent of municipal water was lost through leakage, at a cost of R9.9 billion a year.

Dr Seeraj Mohamed, Deputy Director, PBO, provided an economic background to the Budget. He said global risks to growth were high in an increasingly integrated global economy: There were growing risks of financial instability and crises, increasing climate change events, and global epidemics such as the Covid 19 coronavirus. Key economies such as China , India and Europe  were performing poorly. War and conflict events were increasing.

The South African economy was experiencing serious problems. Aggregate demand levels were low. There were structural, cross-cutting industrial and sectoral economic constraints. There was mass unemployment as well as extraordinary levels of inequality and widespread poverty.

Poor levels of investment remained a problem. South Africa required more than supply side sectoral interventions. There was a need for demand side macroeconomic solutions. Macroeconomic policies that boosted demand would support investment and employment, and could improve the effectiveness of structural interventions. Continued poor economic performance and serious external risks required a countercyclical stimulus, rather than continued fiscal consolidation.

Mr Rashaad Amra, Economic Analyst, PBO, said that government revenue projections and economic growth outlooks had been revised downwards. The PBO expected the 2020 Budget deficit to be 6.2 percent of GDP.  It did not see debt stabilising during the period of the medium term expenditure framework (MTEF). Ratings agencies had downwardly revised South Africa’s sovereign debt rating since 2012. Moody’s agency would release its latest review after the 2020 Budget.  Even if the debt was downgraded, South Africa was still likely to have access to credit markets.

Dr Dumisani Jantjies, Deputy Director, PBO, told the Committees that 71.5 percent of projected tax revenue had been collected by the end of December, 2019. He presented a summary of tax developments over the past year, and said he wished to draw the Committee’s attention to the need to consider how taxes should be collected in an increasingly digitised economy. Taxation policies globally had failed to keep up with developments in digital trading. This had led to losses in corporate tax revenue, as well as losses in value added tax (VAT) and customs tariffs.

Discussion

Mr D Ryder (DA) expressed his concerns about the government's proposals to implement National Health Insurance (NHI). The National Treasury had said the country could not afford it, yet the President had ”clipped the wings” of the Minister of Finance by announcing that it would go ahead. This created p9licy uncertainty.

Mr Ryder referred to speculation that VAT would be increased. A one percentage point increase would raise about R26 billion, but what effect would this have on the country's growth rate? Would it tip the country into recession? He expected that the budget’s tax provisions would again not make allowances for fiscal drag, or bracket creep. This would have an impact on growth. The Finance and Fiscal Commission (FFC) had said that local government needed to be allocated more funds. He wondered whether this would be done in the Budget. There had been repeated promises about a broadband auction, but nothing had happened. How much money would such a spectrum sale raise?

Mr Ryder raised concern about how funds in the Budget’s contingency reserve might be used, given the “dismal” projections about the cash flow of state-owned enterprises (SOEs). The Minister might be tempted to put a lot of money into the contingency fund. Were there any rules to prevent it being used as a “piggy bank?”

Mr G Skosana (ANC) said the PBO had presented a bleak picture of the economy. What measures were needed to address issues such as the 29.1 percent unemployment rate? He commented that he had recently seen the Minister of Finance and other ministers flying in economy class, and commended them for this. What other tangible impacts were there for austerity measures announced by the government? What were the chances of the country surviving a credit downgrade?

Ms M Mabiletsa (ANC) said she fully supported the priorities announced by the President in the SONA. It was now up to government departments to plan and implement them. She appealed to “those who oppose everything” to support plans for the NHI and the roll-out of water and sanitation projects.

Mr E Njandu (ANC) said it appeared that money allocated to some departments in budget adjustments was not being spent. He agreed with the SONA priorities.

Mr G Hill-Lewis (DA) asked Dr Mohamed what he meant when he referred to demand-side macroeconomic solutions. Did this mean lower taxes or higher debt? Statistics supplied by the PBO showed that revenue collection for almost all tax categories was down. Was South Africa at the top of the Laffer Curve?

PBO’s response

In response to questions about the NHI, Ms Orlandi reminded Members that Parliament had since 2012 been approving grants for the NHI. The current NHI draft Bill had two sections. One part dealt with the establishment of the fund. The other dealt with the provision of health services, and this was where there was not enough money to provide all that was required. Grants were being made to provide additional services. However, there were instances where grants were not spent. A bigger health service was being implemented, but this was happening slowly. 

Ms Orlandi said the contingency reserve fund was allocated R6 billion a year over the medium term. The funds were to be used on whatever needs were identified. There were no rules about how the money should be spent. However, any spending had to be reflected in the annual Adjustments Budget and approved by Parliament.

Ms Orlandi said the Committees needed to consider ways of improving the way in which the implementation of government priorities was monitored. Overall planning and monitoring functions had been transferred some years ago from the National Treasury to the Presidency and the provincial premiers’ offices.  This meant that committees received only expenditure numbers in report-backs from the Treasury. There was no performance information on the results of the spending. This made Parliamentary oversight difficult. Efforts should be made to ensure that development priorities outlined by the government “filtered down” into annual performance plans which could be monitored by the committees.

Dr Mohamed said the PBO had not done any research on the money that could be raised from a broadband auction,. However, he agreed it could raise a lot of revenue. He said an increase in VAT would put further pressure on household consumption, and this could have an effect on the gross domestic product (GDP).

On the question of demand-side economic policy, Dr Mohamed said reducing taxes would be difficult in the current economic environment. The alternative was to consider fiscal measures. There was a global discussion on the limitations of monetary policy. He said the Laffer Curve theory was now discredited by the economics profession.

Dr Jantjies added that the theory made unrealistic assumptions. A variety of factors affected revenue collection, not just the tax rate.

Ms Fatsani Banda, Economic Analyst: PBO, referred to measures to reduce unemployment, and said the private sector was responsible for driving employment. There was a need to create an environment which encouraged investment and led to the creation of stable job opportunities.

Further discussion

Ms M Mohlala (EFF) said corruption and mismanagement contributed to the poor state of the economy. The VAT rate should be reduced and corporate taxes should be increased instead.

Mr M Moletsane (EFF) said there was a serious shortage of accommodation at tertiary education institutions. What was being done to address this?

Mr Hill-Lewis asked Mr Mohamed to be more explicit about what he meant by fiscal measures to stimulate the economy. Would this not lead to greater debt?

The acting Chairperson questioned whether training initiatives were supplying the skills demanded by the markets.  She commended the PBO for highlighting the high levels of inequality in the economy.

PBO’s response

Dr Mohamed responded to questions about the effects of a credit rating downgrade. He said it should be borne in mind that countries did not go bankrupt. This did not mean that South Africa should default on its debts. It would have to budget for a higher cost of borrowing and spend more efficiently. The risks posed by a downgrade should be viewed against many other risks posed by macroeconomic events in the global economy.

On Mr Hill-Lewis’s questions about taxes and debt, he said an increase in tax rates could have an impact on household spending. Instead, borrowing money and spending it in a very targeted way could have a positive impact by raising aggregate demand and GDP.

On the issue of training and skills, Dr Mohamed said too many people were trying to go to university instead of enrolling at TVET colleges. This placed a lot of pressure on the university system. The government was trying to turn the situation around. 

The acting Chairperson thanked the PBO for the presentation, and reminded Committee Members that the PBO was not an implementing agency, but rather an advisory office for the Finance Committees.

The meeting was adjourned.