2019 Budget: Parliamentary Budget Office briefing

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Finance Standing Committee

26 February 2019
Chairperson: Ms Y Phosa; Mr C De Beer (ANC)
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Meeting Summary

Parliamentary Budget Office - Pre-budget discussion 20192019 Budget Speech;  2018 MTBPS

The Finance and Appropriations Committees met jointly for a briefing by the Parliamentary Budget Office (PBO) on the 2019 Budget. This was a follow-up meeting with MPs.

The PBO said the 2019 Budget priorities included the following: narrowing the budget deficit and stabilise the national debt-to-GDP ratio; support the restructuring of the electricity sector; renewal of economic growth by strengthening private sector investment; and improving the planning and implementation of infrastructure projects; and rebuilding state institutions. Government revised economic growth expectations downwards. Predictions are that improvements in business and consumer confidence, and more effective public infrastructure spending, will be partially offset by slower global growth. To support future growth government ought to: stabilise state-owned entities (SOEs); further reduce policy uncertainty and blockages; and strengthen state capability through comprehensive structural reforms. The overarching question was whether these measures proposed, would adequately consider the poor levels of aggregate demand in the economy and the potential catalytic role of the Budget. Notably, government estimates of household consumption and investment growth are low. Poor household demand and deteriorating global conditions may pose downside risks to investment in South Africa despite investment summit pledges. Household consumption has generally been around 60% of GDP since 1950s. Household savings should not be suggested as the only driver of poor levels of private investment and reason for more foreign investment. Some current and future expenditure challenges were as follows: water and sanitation; rail transport in specific functioning of PRASA and how it influences government objectives to shift from road to rail; and infrastructure spending performance in the forms of backlogs in education, as well as slow spending on health infrastructure to provide for universal access. Robust governance structures in supply chain management, project management, contract management and continuous funding for capacity building in local government was also crucial.

Members noted that 68% of government expenditure went towards social commitments, with compensation accounting for more than 35% of consolidated public spending. They emphasised the need for accountability in public expenditure particularly in SOEs. Members commented on debt as a percentage of GDP noting that there seems to be no end to runaway spending and debt accumulation. There was need for radical change in terms of how government spends money. They asked if the PBO believed measures proposed by government to address challenges at Eskom were adequate. Further, municipalities were not servicing their debts with Eskom due to rates non-payment by residents. This could partly explain Eskom’s revenue challenges and it appears government was not doing enough to address this challenge.

Meeting report

Ms Phosa welcomed everyone to the 2019 Budget briefing by the Parliamentary Budget Office (PBO). She invited a presentation by the PBO.

Parliamentary Budget Office (PBO) presentation

Ms Nelia Orlandi, Deputy Director: Public Policy, PBO, said the 2019 Budget priorities included the following: narrowing the budget deficit and stabilise the national debt-to-GDP ratio; support the restructuring of the electricity sector; renewal of economic growth by strengthening private sector investment; and improving the planning and implementation of infrastructure projects; and rebuilding state institutions.

Macroeconomic overview

Government revised economic growth expectations downwards. Predictions are that improvements in business and consumer confidence, and more effective public infrastructure spending, will be partially offset by slower global growth. To support future growth government ought to: stabilise state-owned entities (SOEs); further reduce policy uncertainty and blockages; and strengthen state capability through comprehensive structural reforms. The overarching question was whether these measures proposed, would adequately consider the poor levels of aggregate demand in the economy and the potential catalytic role of the Budget.

Notably, government estimates of household consumption and investment growth are low. Poor household demand and deteriorating global conditions may pose downside risks to investment in South Africa despite investment summit pledges. Household consumption has generally been around 60% of GDP since 1950s. Household savings should not be suggested as the only driver of poor levels of private investment and reason for more foreign investment.

Mr Rashaad Amra, Economic Analyst, PBO, said arresting fiscal slippage to prevent a credit downgrade would be crucial. A downgrade by Moody’s will have significant adverse effects for public finances, growth and development. In an event of a downgrade, SA bonds will be excluded from global bond indices, and sell-off of the bond may result in a weaker Rand. Increased borrowing costs for debt to be issued (the impact of a 1% point increase in borrowing costs would result in a R10 billion increase in interest payments over the Medium Term Expenditure Framework (MTEF)) would also result. Moody’s opinion was expected at the end of March and was contingent on the credibility and implementation of plans to address fiscal situation of strained SOEs.

Revenue and expenditure

Dr Dumisani Jantjies, Deputy Director: Finance, PBO, noted that taxation incentives were being reviewed, and the fiscus was expected to benefit from more targeted incentives. Despite increases in tax, revenue as a percentage of GDP shows a declining trend from the previous two years. Corporate Income Tax (CIT), unlike Personal Income Tax (PIT) and Value-Added Tax (VAT), was expected to decline over the medium term; despite expected economic growth. There is international discourse about tax strategies and policies in taxing of income and profits in a digitised economy and government will update Parliament on this.

In efforts to improve infrastructure planning and delivery, the Budget Facility for infrastructure technical team has strengthened state capacity to: consider and budget for complex capital infrastructure. Projects that do not represent value for money needed to be turned down. The government infrastructure investment plans amounted to R526 billion over MTEF, and at least R100 billion would be allocated over the coming decade.

The Development Bank of South Africa (DBSA) and National Treasury were also expected to step up infrastructure lending. The DBSA experience with independent power producers (IPPs) suggest blended approach can be used in various projects. Treasury would have to review existing legislation to seek ways to incorporate blended-finance arrangement. Some current and future expenditure challenges were as follows: water and sanitation; rail transport in specific functioning of PRASA and how it influences government objectives to shift from road to rail; and infrastructure spending performance in the forms of backlogs in education, as well as slow spending on health infrastructure to provide for universal access. Robust governance structures in supply chain management, project management, contract management and continuous funding for capacity building in local government was also crucial.

Ms Orlandi, in closing, said the State of the Nation Address provided the strategic direction for the 2019 Budget. The current macroeconomic situation required a downward adjustment to the macroeconomic outlook, and this adjustment together with expenditure and global pressures informed the new fiscal framework. There was little room for revenue adjustments owing to high pressures on: expenditure; borrowing; and support to SOEs. Government was making efforts to deal with these pressures in several ways, but challenges still remain.          

Discussion

Mr De Beer appreciated the presentation by the PBO. He noted 68% of government expenditure went towards social commitments, with compensation accounting for more than 35% of consolidated public spending. He emphasised the need for accountability in public expenditure particularly in SOEs. There was need for accountability for every cent spent and the credibility of figures presented to Parliament. There must be robust oversight particularly in SOEs. 

Mr A McLoughlin (DA) commented on debt as a percentage of GDP. There seems to be no end to runaway spending and debt accumulation. How could this be curbed and the debt stabilised? Government seems to be finding many ways to compound problems especially as affecting Eskom. The country could not carry on like this. There was need for radical change in terms of how government spends money. The government needed to get serious about this.

Ms D Mahlangu (ANC) asked about the projected decline in revenue from CIT. She sought clarity about this as she believed the more money the corporate sector makes, the more they needed to pay in taxes.

Mr M Chabangu (EFF, Free State) asked if the rationalisation of the public wage bill through the freezing of posts and retirement of public servants would also affect ministerial staff. As it stood, ministerial staff appointments were not properly regulated. Further, was government thinking about subsidising motorists in the near future, given the continual fuel increases? On Eskom and SOEs, would there still be additional bail outs, seeing they were continually deteriorating?

Mr M Monakedi (ANC, Limpopo) asked if the PBO believed measures proposed by government to address challenges at Eskom were adequate. Further, municipalities were not servicing their debts with Eskom due to rates non-payment by residents. This could partly explain Eskom’s revenue challenges and it appears government was not doing enough to address this challenge. He asked if rationalisation of SOEs so as to ease fiscal pressures was being considered.

Mr De Beer pointed out that some of the Members’ questions were responded to by the Minister during a previous engagement. He was also not so sure whether some of the questions should be directed to the PBO; they should be directed to the Executive instead. He invited responses from the PBO.

Mr Amra replied that debt as a share of GDP has been on the increase for the past ten years. The biggest determinant for the debt ratio increase has been poor economic growth, resulting in weaker revenue growth, larger deficits and more borrowing. Debt service costs have also been increasing in equal measure. As a means to curb the growth in compensation spending, government proposed the freezing of public service posts- a blunt instrument to achieving an end. On measures proposed to address challenges at Eskom, the PBO did not have a view as additional details were still yet to be released by government. He agreed that having credible and implementable plans to deal with challenges in SOEs as pointed out by Members was paramount.

Mr Seeraj Mohamed, Deputy Director: Economics, PBO, added there was need for the consideration of demand-side determinants for driving economic growth as the catalytic role of consumption was clear. There were ongoing debates about whether stabilising the debt at below 40% would help bring about economic growth. Reforms to bring about policy certainty and increased investor confidence through private sector and stakeholder engagement were also important.

Mr De Beer emphasised the need to crack down on smugglers and tax dodgers. Illicit trade and financial flows had to be nipped in the bud to ensure revenue collection capacity is spruced up. The integrity and effectiveness of the South African Revenue Service would be crucial in spearheading this. He thanked everyone for their inputs.

The meeting was adjourned.

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