FISCAL OVERSIGHT OPPORTUNITIES AND CHALLENGES FOR 2017 AND BEYOND A STRATEGIC PLANNING REVIEW SESSION OF THE STANDING COMMITTEE ON APPROPRIATIONS 04 MAY 2017
PRESENTATION OUTLINE 1. Background 2. Impact of fiscal downgrade for fiscal oversight purposes 3. Mid-term progress and performance 4. Opportunities and challenges 2
1. BACKGROUND
LEGISLATIVE MANDATE The Standing Committee on Appropriations (the Committee) was established in terms of Section 4(3) of the Money Bills Procedures and Related Matters Act (2009) The main functions of the Committee as outlined in the Act relate to: Spending issues Amendments to the Division of Revenue Bill, the Appropriation Bill, Supplementary Appropriation Bill and the Adjusted Appropriation Bill; Consider recommendations of the Financial and Fiscal Commission (FFC), including those referred to in the Intergovernmental Fiscal Relations Act, 1997 (Act No. 97 of 1997); Reports on actual expenditure published by the National Treasury (section 32 reports); and Any other related matters. 4
WHAT IS OVERSIGHT? Oversight entails the informal and formal, watchful, strategic and structured scrutiny exercised by legislatures, including Parliament, in respect of the implementation of laws, the application of the budget, and the strict observance of statutes and the Constitution. Parliamentary Report on Oversight Model of the South African legislative Sector (2012) According to the Parliamentary report (2012), the functions of oversight are: To detect and prevent abuse, arbitrary behaviour or illegal and unconstitutional conduct on the part of the government and public agencies To hold the government to account in respect of how the taxpayers' money is used by detecting waste within the machinery of government and public agencies. Thus improving the efficiency, economy and effectiveness of government operations To ensure that policies announced by government and authorised by Parliament are actually delivered. This function includes monitoring the achievement of goals set by legislation and the government's own programmes To improve the transparency of government operations and enhance public trust in the government 5
WHAT IS OVERSIGHT? [CONT.] According to Section 55(2) of the Constitution The National Assembly must provide for mechanisms to ensure that all executive organs of state in the national sphere of government are accountable to it; and to maintain oversight of (i) the exercise of national executive authority, including the implementation of legislation; and (ii) any organ of state The Committee s role is therefore central to Parliament s oversight function and responsibilities 6
2. IMPACT OF CREDIT DOWNGRADES FOR FISCAL OVERSIGHT PURPOSES
CREDIT DOWNGRADES AND IMPACT ON What is Sovereign Credit Rating? FISCAL OVERSIGHT A sovereign credit rating provides a relative ranking of a country s overall credit worthiness The lower the credit rating, the higher the credit risk and therefore, the higher the interest rate that the borrower will have to pay in order to compensate the lender for the extra risk We need to distinguish between the foreign currency denominated debt and the local currency denominated debt South Africa s foreign currency denominated debt rating has been downgraded to junk status (sub-investment grade) by Fitch and Standard and Poor (S&P), while local currency denominated debt downgraded to junk status by Fitch only 8
After downgrades On Review BB+ BBB- BB+ BB+
CREDIT DOWNGRADES AND IMPACT ON FISCAL OVERSIGHT Besides fiscal variables (e.g. debt/gdp), rating agencies also analyse other policy measures Statistical studies show GDP per capita explain 80% of changes in rating agencies assessments of countries (i.e. GDP per capita = GDP/population) This indicator bodes poorly for South Africa 12
CREDIT DOWNGRADES AND IMPACT ON FISCAL OVERSIGHT [CONT.] What impact will the sovereign credit rating downgrade have on the economy and citizens? The Rand is likely to weaken Many international and local investment funds can only place money in investment grade jurisdictions A credit downgrade to junk status will likely see investment funds selling South African bonds and equities, adversely affecting the value of the rand leading to increase in costs of imports and keeping inflation elevated for longer A weaker rand means higher fuel prices and higher prices for imported food stuffs (E.g. imported staples such as maize and sorghum) A weaker rand however, can benefit mining, tourism and some exports (those not overly-reliant on using imported inputs) It will cost South Africa more to borrow money in global markets Investors will demand a higher interest rate (coupon rate) after the downgrade to account for the extra risk related to South African bonds 13
CREDIT DOWNGRADES AND IMPACT ON FISCAL OVERSIGHT [CONT.] South African consumers are highly indebted and the cost of servicing this debt may become more expensive The Reserve Bank may be forced to raise interest rates if higher inflation materializes Parastatals and South African Banks could be downgraded The ratings of corporate bonds of South African companies are linked to the ratings of the sovereign The higher cost of borrowing by parastatals and South African Banks may be passed onto the consumer 14
CREDIT DOWNGRADES AND IMPACT ON FISCAL OVERSIGHT [CONT.] What are the potential fiscal impact of the credit downgrade? Increase in debt service costs, decline in tax revenues and increase in cost imported goods (medicines, machinery, etc.) What are the unknowns? The extent to which debt service costs will increase The full impact on the economy and how this may affect economic growth and subsequent tax income Table. Simulation of a potential increase in debt-service costs on the consolidated budget balance Budget Balance (R billion) 2017/18 2018/19 2019/20 MTEF (2017/18 19/20) Low scenario (5%) 8.12 9.04 9.87 27 Medium scenario (10%) 16.24 18.07 19.73 54 High scenario (20%) 32.48 36.14 39.46 108 17
CREDIT DOWNGRADES AND IMPACT ON FISCAL OVERSIGHT [CONT.] Government could respond in three ways to meet the potential fiscal shortfall arising from any future increase in debt service costs and possible increase in imported goods Option 1: Increase taxes Option 2: Cut expenditures Option 3: Increase debt or Option 4: Combination of the above From an oversight perspective, the committee should be apprised of the full impact of the credit downgrade on the economy and fiscal impacts on the budget The committee should also be apprised of government plans to mitigate any negative fiscal impact of credit downgrades and how any fiscal shortfall will be funded and likely impact on the economy 18
3. MID-TERM PROGRESS & PERFORMANCE
IMPLEMENTATION OF THE NATIONAL DEVELOPMENT PLAN Fiscal Years 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 Election Election Election Electoral Cycle Medium Term Strategic Framework Medium Term Strategic Framework Medium Planning & Budgeting Five-year Strategic and Performance Plans Annual Performance Plans and Budgets (with MTEF) MTEF MTEF MTEF MTEF 5 year Strategic & Performance Plan Budget 5 year Strategic & Performance Plan... Budget Budget Budget Budget Budget Budget Budget Budget APPs APPs APPs APPs APPs APPs APPs APPs APPs APPs APPs APPs In-year Reporting Monthly Financial Reports Quarterly Performance Reports End-year Reporting Annual Reports (with annual financial statements) Long-term Reporting End-term Performance Reviews MR MR MR MR MR MR MR MR MR MR MR MR MR MR MR MR MR MR MR MR MR MR MR MR MR MR MR MR MR MR MR MR MR MR MR MR MR MR MR MR MR MR MR MR MR MR MR MR Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 AR AR AR AR AR AR AR AR AR AR AR AR EPR EPR Ten Year Reviews 10yr 20
MEDIUM-TERM STRATEGIC FRAMEWORK The National Development Plan (NDP) highlighted that poverty, inequality and unemployment continue to negatively affect the lives of many people in South Africa The NDP called for bold steps to eliminate poverty, create jobs and sustainable livelihoods, and substantially reduce inequality The Medium-Term Strategic Framework (MTSF) 2014 19 is the key overarching instrument that government uses in the current electoral cycle in implementing the National Development Plan (NDP) This is the first MTSF following the adoption of the NDP in September 2012 and is seen as a stepping stone towards achieving vision 2030 The aim of the MTSF is to ensure policy coherence, alignment and coordination across government plans and budgeting processes 21
Priority Areas Indicator 2030 NDP Target 2019 MTSF Target Achieveme nt to date Education Percentage of learners in grades 3,6 & 9 tested through ANAs achieve 50% in both literacy and numeracy No. of Grade 12 learners qualifying for university entrance (maths and science) 80% 50% 450 000 250 000 172 000 (2013) Health Life expectancy (years) 70 years 63 years Infant mortality rate (per 1000 births) 20 /1000 births 18/1000 births 27 [2012] Under -5 mortality rate (per 1000) 30/1000 23/1000 41 [2012] Employment GDP growth rate (%) Average 5% p.a 5% 0.4 % [2016] Share of national income of bottom 40/60% HH (%) 10% income of bottom 40% of HH 10% income of bottom 60% HH 5.6% [2011/12] Official unemployment Rate (%) 24 million employed 14% 25% [2013] Skilled Workforce No. of work based learner opportunities 1 million 140 000 Sustainable Rural Communities % of productive land owned by PDI in rural areas N/A 20% 11.5% [2013] % of HH vulnerable to hunger N/A 9.5% 11.4% [2013] Rural unemployment rate (%) N/A 40% 49% Local Government % of HH with access to water services N/A 90% [85% [2013] Social Assistance Unemployed supported through CWP % of eligible people benefitting from CSG, disability grant and old age pension 1 million 95%
IMPLICATIONS FOR OVERSIGHT The Committee needs to be kept abreast of government progress in achieving 2019 targets, especially in the context of the revised economic outlook There is therefore a need for an integrated and credible data warehouse that can provide up-to date information about progress being made in pursing government priorities, drawing from data gathered from various monitoring tools The Department of Performance Monitoring and Evaluation (DPME) is working with Statistics South Africa (StatsSA) to establish a credible data warehouse The Committee should liaise with DPME on: Any information that should be included in the data warehouse for oversight purposes related to the MTSF Be regularly briefed on government progress towards achieving 2019 targets Be made aware of implementation and fiscal weaknesses and areas that would require oversight focus 23
SPENDING PROGRAMMES AND AREAS THAT REQUIRE MONITORING DUE TO HIGH FISCAL RISK PROFILE
AREAS OF FISCAL RISK There are a number of key fiscal risk areas that were identified in the 2017 budget that should be monitored from an oversight perspective Subdued economic growth, which is likely to remain a significant risk to the national budget over the 2017/18 financial year Policy changes without due consideration of budgetary implication (e.g. Higher education, NHI, etc.) Poorly designed infrastructure projects or those not effectively delivered have resulted in high operating deficits Require proper financial modelling before projects approved The public sector wage bill is another risk area that should be carefully monitored. Government will commence with negotiations on a new wage bargaining agreement this year With the recent downgrade, the debt service costs becomes a major fiscal risk that needs to be monitored 25
AREAS OF FISCAL RISK [CONT.] There is uncertainty regarding the path of revenue collection Government collected R30 billion less tax than projected There is a lack of clarity about whether the under-collection is solely a result of economic factors or ineffective administration Another area of fiscal risk are financially distressed or mismanaged state companies These state companies have the potential to weaken fiscal sustainability if not managed properly The balance sheets of many of these entities are overstretched with government guarantees to public entities totaling R477.7 billion or 11.5 % of GDP Financial imbalances are building up in the public sector, particularly in water, electricity and property taxes There are substantial unsettled bills between national, provincial and local government 26
4. OPPORTUNITIES AND CHALLENGES
ASSESSING SCOA BUDGET OVERSIGHT SUCCESS Year Number of Recommendations by Appropriations Committees Number of Recommendations by Finance Committees 2013 On 2012 MTBPS: 4 recommendations Adjustments Appropriation Bill: 1 recommendation On DoR Amendment Bill: 0 recommendations Proposed DoR and conditional grant allocations to provincial/ local spheres as per 2013 MTBPS: 0 recommendations TOTAL RECOMMENDATIONS: 5 2014 On 2013 MTBPS: 6 recommendations Adjustments Appropriation Bill: 3 recommendations On DoR Amendment Bill: 7 recommendations Proposed DoR and conditional grant allocations to provincial/ local spheres as per 2013 MTBPS: 8 recommendations TOTAL RECOMMENDATIONS: 24 2015 On 2014 MTBPS: 10 recommendations On DoR Amendment Bill: 5 recommendations Proposed DoR and conditional grant allocations to provincial/ local spheres as per 2014 MTBPS: 5 recommendations TOTAL RECOMMENDATIONS: 20 2016 On 2015 MTBPS: 14 recommendations Adjustments Appropriation Bill: 3 recommendations On New Development Bank Special Appropriations Bill: 4 recommendations On DoR Amendment Bill: 5 recommendations Proposed DoR and conditional grant allocations to provincial/ local spheres as per 2015 MTBPS: 2 recommendations TOTAL RECOMMENDATIONS: 28 on 2012 Revised Fiscal Framework: 4 recommendation s On 2013 Revised Fiscal Framework: 8 recommendations On 2014 Revised Fiscal Framework: 9 recommendations On 2015 Revised Fiscal Framework: 12 recommendations Various sections (e.g. s2(3), s6(5)(6), S8(4), S10, s11, s12) of MBAPRMA allow the Finance and Appropriations Committees to make recommendations and/or amend money bills Number of recommendations by the Finance and Appropriations Committees rising steadily over the years especially since 2014 To date, recommendations made by these Committees generally accepted by the Minister of Finance, which suggests influence of Committees over fiscal matters are increasing 2 8
STRATEGIC FOCUS AREAS FOR FISCAL OVERSIGHT The Committee s mandate is broad. Given existing constraints, it cannot monitor everything government does. It has to be strategic and focus on priority areas being implemented that will make the greatest contribution to achieving the MTSF outcomes and targets and address key risk areas The Committee should consider playing a leadership role in coordinating and supervising with other committees in Parliament the overall monitoring of the MTSF targets and outcomes Some of the main MTSF outcome areas that should be considered as key oversight areas are: Health (E.g. NHI, access to quality education) Education (higher and basic) (E.g. quality of basic education, universal access to ECD, provisioning and funding of higher education to meet needs of modern economy and regional strategic advantage) Social Protection (E.g. universal access of social grants, monitoring implementation) and Rural Development (E.g. job creation, access to productive land, etc.) 29
High Fiscal Risk Factors Monitoring Required Subdued economic growth Policy changes and fiscal implications Poorly designed infrastructure projects Monitor how government is going to safeguard the country against any further credit rating downgrade Ensuring reliable electricity supply Monitor government plans to unblock drivers of economic growth and youth employment Fiscal impact of various proposals to fund higher education Fiscal impact of implementing NHI Ensure legislation and policies of government are properly costed before being tabled in Parliament Monitor the performance of big infrastructure projects and ensure processes are in line with good practise Monitor government plans to address weaknesses in infrastructure planning and implementation (E.g. establishment of a technical unit and governing board) Identify departments /entities that are implementing infrastructure projects poorly and investigate what plans are being put in place to improve performance Public Sector wage bill Monitor progress in implementing government efforts to curb wage bill Monitor government readiness on negotiations on new wage bargaining agreement
High Fiscal Risk Factors Debt-service costs Path of revenue collection Financially distressed or mismanaged state companies Financial imbalances in water, electricity and property taxes Monitoring Required Investigate the full impact of rating downgrade on the economy and fiscus and any plans government is putting in place to mitigate fiscal risks Monitor key fiscal indicators in upcoming MTBPS and investigate how government is going to meet sustainable debt/gdp levels and other fiscal indicators over next MTEF Investigate main reasons for the R30 billion under-collection of revenue Monitor government plans to boost revenue collection and strengthen institutional capabilities at revenue agency Investigate what fiscal principles government will implement to consider any funding requests from SoEs and avoid impact on budget balance Monitor financial health of public entities and investigate steps government is taking to stabilise those in financial trouble Investigate the key challenges related to financial imbalances and what the blockages are in addressing these challenges Monitor any plans government is putting in place to ensure a municipality, province or national department pay services owed to another government agency
Fiscal Oversight Opportunities CONCLUSION To assess the committee s oversight performance, the committee should consider keeping track of government s progress in implementing its recommendations by requesting periodic feedback from National Treasury (on behalf of government) The committee should consider as part of its plans until 2019 whether it wants to explore other fiscal gaps existing in Parliament s oversight role E.g.1 The Auditor-general conducts performance audits on government departments and entities. No committee in Parliament is currently taking ownership of these performance audits, yet this speaks to the three Es E.g.2 FFC makes recommendations directly to Parliament but no committee is actively tracking the implementation of these recommendations E.g. 3 Committees in Parliament make budgetary recommendations annually during the BRRR process, yet there is no aggregation of these recommendations by a scorekeeper to ensure they are cumulatively coherent 32
FFC S WEBSITE: WWW.FFC.CO.ZA 33