SA’s economic outlook is “unlike any situation experienced before”, according to the Financial and Fiscal Commission (FCC), and requires “informed and strategic” policy from decisionmakers and a commitment to make major structural changes to public finances.
The FFC is the constitutional body that advises the government on financial and fiscal matters. It published its recommendations for 2022’s budget framework on Tuesday, based on research into the effects of Covid-19 on government finances.
The report, which is a submission to treasury in preparation of the 2022/23 Division of Revenue Act, examined both the macroeconomic effect of the pandemic and the effect on local government finances, among other areas.
The pandemic “has exposed many of the structural weaknesses in the domestic economy and increased the risk of a public debt spiral, which is undermining the country’s fiscal credibility. Simply put, the current economic outlook is unlike any situation experienced before and requires policy that is informed and strategic. Tangible steps are needed to achieve structural transformation,” the commission said in a media release.
While the government has tabled fiscal consolidation plans, it is yet to present a plan on how to go about consolidation, said acting head of the commission Michael Sachs.
On the macroeconomic level the commission’s recommendation was in favour of fiscal consolidation but, to avoid damaging consequences, the government required “a decisive and coherent strategy to fiscal repriortisation”.
This, says the report, means targeting cuts in areas of underspending and questionable performance. The government also needed to merge and downsize government departments and public entities, especially where functions were duplicated.
Two other important issues singled out were the investment in the use of technology to improve the capability of public sector performance and the eradication of contract mismanagement and procurement irregularities.
The commission also measured the effect of public spending within a “performance-based budgeting framework” in which funding is linked explicitly to results for a particular programme. The effect of public spending was poor, and the implementation of “effective and efficient expenditure controls was a matter of utmost urgency”, it recommended.
The key performance indicators of departments should be linked to financial commitments in departmental budgets, said the commission.
“Indicators that incentivise a target that is costed are encouraged as opposed to merely indicating progress on a specific objective,” says the report.
On the local government level, the commission’s research found that the pandemic had caused “significant dislocations in virtually all municipal revenue streams”, giving rise to “liquidity crises of huge proportions”.
While some municipalities had rebounded, Covid-19 had “generally condemned municipalities deeper into debt”.
The increase in consumer debt has rendered many municipalities unable to service their own debt, especially to utilities such as Eskom and the water boards, says the report. Among the recommendations of the commission were that municipalities “should undertake a detailed and unbiased analysis of the services they provide to align their responsibilities, services and programmes to their financial capabilities”.
The government and the SA Local Government Association (Salga) should assist municipalities to ensure that municipal organigrams, staffing levels and the compensation of employee budgets are set at levels that do not crowd out service delivery expenditures. In addition, these role players should ensure that municipal budgets are credible and based on realistic revenue collection rates. National and provincial treasuries, CoGTA and Salga should support and monitor progress in this regard.
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