People's
Budget Comments on Draft 2002 Division of Revenue
Bill and Explanatory memorandum
Table of Contents
Introduction
These are the comments of the People's Budget - comprising
the South African NGO Coalition (SANGOCO), the Congress
of South African Trade Unions (COSATU), and the South
African Council of Churches (SACC) - on the Draft
2002 Division of Revenue Bill and Explanatory Memorandum.
This response should be read in the context of our
submission on the 2001 Medium Term Budget Policy Statement
(MTBPS), presented to the Joint Budget Committee on
8 November 2001, which deals in more detail with the
functional allocation of expenditure.
The People's Budget, and its constituent organisations,
have been vocal about the need for a comprehensive
overhaul of the budget process to make it more open,
democratic, and participatory.1 In this context we
welcome the publication, for the first time, of a
Draft Division of Revenue Bill and Explanatory Memorandum
in advance of the tabling of the Budget itself. This
does open one more window for stakeholders and the
public at large to engage with the budget cycle. Unfortunately
little time was provided to analyse and respond to
the detail of these documents, thus limiting our comments
at this stage.
It is not clear how (if at all) comments made on the
Medium Term Budget Policy Statement have been factored
in to the Draft Bill, or how comments on the gazetted
documents will be incorporated to the Budget itself.
For the process to be meaningful, there does need
to be a sense that inputs are taken seriously by Treasury
and changes made where necessary. Moreover, we are
concerned that the budget reform process seems to
be undertaken in a piecemeal fashion, without public
discussion as to how the whole process should be reformed.
This submission firstly explains the character and
objectives of the People's Budget. Thereafter we discuss
the macroeconomic context in which the Draft Division
of Revenue Bill has been published, comment overall
on the macroeconomic parameters framing its allocations,
and on specific aspects of expenditure. We also pick
up on certain aspects of the discussion in the Explanatory
Memorandum around recommendations of the Financial
and Fiscal Commission (FFC). Lastly we comment on
the reform of the budget process and on future plans
of the People's Budget.
The People's Budget
The People's Budget was launched by the SACC, SANGOCO
and COSATU in 2000, representing the three key pillars
of civil society: the church community, non-governmental
organisations, and trade unions. The central objective
of the People's Budget is to present alternative Budget
proposals which give effect to developmental priorities.
At the time of the tabling of government's budget
this February we also released proposals of the People's
Budget, which covered both macroeconomic parameters
and programmatic priorities.
The Peoples Budget attempts to define fiscal strategies
that can eradicate poverty, support economic development
and ensure greater equity by race, gender and class,
by:
Meeting basic needs, especially by enhancing the public
services and social spending;
Ensuring the retention and creation of quality jobs;
Giving the majority of people greater access to assets
and skills;
Supporting a deepening of democratic and participatory
governance; and
Protecting the environment and ensuring development
throughout the Southern African region.
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The diagram below depicts a developmental strategy
that could break the vicious cycle of poverty. This
strategy bolsters the impact of fiscal policy, which
will have a greater capacity to promote economic
growth and job creation if households have higher
living standards and greater access to resources and
skills. Higher rates of economic growth also expand
the fiscal resource base, supporting even greater
levels of social delivery, accelerating the virtuous
cycle.
Underpinning this vision is a developmental role for
the state. Four major roles are required for the state
to fulfil these roles. These are:
The state must drive a growth strategy that focuses
on providing strong policy support for sectors to
protect and create quality jobs, meet basic needs for
the poor, expand production for the domestic market,
and expand exports.
The state must provide a social wage that sets a
floor of living standards for all South Africans. The
social wage comprises government services and grants
provided to households in addition to earned income.
It should ensure that no one faces absolute poverty.
The social wage must:
provide welfare grants, education, health care,
policing and housing at a level sufficient to support
community development;
accelerate skills development and improve education
on a mass scale;
develop more efficient, socialised systems to meet
retirement, transport and health needs for working
people, which effectively enhance the efficiency of
the economy as a whole; and
be designed to support economic growth and
employment creation.
The state must also transform itself to strengthen
democracy and the public sector through the
establishment of systems to permit greater
participation by the majority, who historically have
been shut out of power, as well as the resourcing of
more coherent and effective delivery systems and
structures. Steps to achieve this end include
establishing participatory procedures for policy
development and strengthening Parliament, especially
to amend money bills and participate in policy
development. They must also include measures to
control lobbying by big business and to limit
patronage and corruption.
The developmental state must support alternative
centres of economic power. All the other strategies
can contribute to this aim. They can change the nature
of wealth by supporting a stronger state sector,
co-operatives and small and micro enterprise, linked
in part to land reform, improved housing, and
investment in skills development.
Adapting the budget to overcome the poverty trap
requires that expenditure increases to support inter
alia an effective strategy to restructure the economy,
co-ordinated with measures to improve the social wage;
expansion of the social wage in general, with the
introduction of a Basic Income Grant, and
establishment of National Health Insurance, and
stronger measures to combat HIV/AIDS;
a coherent skills development strategy; and
better integration of infrastructure and housing
development with the overall growth strategy.2
Draft Division of Revenue
Overall
macroeconomic analysis
Over the past five years or so the emphasis on
fiscal austerity has produced a perverse planning
paradigm in which developmental objectives have been
supplanted by the secondary objective of reducing the
government deficit. The hope that this tight fiscal
and monetary policy would attract private investment
which in turn would drive economic growth, create
jobs, and lead to a more equitable income
distribution, has not materialised – in fact the
opposite has happened. Instead of leading job
creation, private capital has led job shedding and
capital disinvestment.
The unresponsiveness of private capital to what was
said to be an investor-friendly macroeconomic policy
also points to the need for a state-led development
path. There seems to be an emerging consensus that
investment follows growth, rather than the other way
around. Again the emphasis on boosting infrastructure
spending is relevant here, in terms of "crowding in"
investment.
The People's Budget thus does not share the
Treasury's view (expressed in the MTBPS) that the
fiscally austere policies of the past few years have
in some way provided the basis for a somewhat more
expansionary stance, and that the contractionary
policies are now beginning to bear fruit.
On the contrary, the cutbacks from about 1996
onwards have had devastating effects on social and
economic service delivery in South Africa. Had more
resources been invested during this period in the
construction of schools, training of teachers,
provision of primary healthcare, extension of roads,
and so on, we would today be reaping the benefits of
these investments.
This would have taken the form, amongst other
things, of better skilled school-leavers, a healthier
population, and economic infrastructure more conducive
to economic growth. Fiscal austerity has also directly
reduced rather than built the capacity of the public
service to spend allocated resources, resulting in
substantial rollovers. The costs of recovering lost
time of socio-economic development are greater than if
adequate resources had been invested during this
period.
Macroeconomic parameters of the Draft Division of
Revenue
We believe that the moderately more expansionary
stance of the 2001 MTBPS, and which frames the Draft
Division of Revenue Bill, is a small but important
step towards recovering the "lost years". It is
certainly an improvement on the extremely fiscally
austere budgets of the late 1990's. However, it is
still inadequate to meet the broader goals of
alleviating poverty, creating employment and ensuring
economic growth.
In terms of the specific macroeconomic parameters
reflected in the Draft Division of Revenue, the fact
that last year's revised deficit:GDP ratio is lower
than had been budgeted for (2.3% as opposed to 2.5%)
is of concern. It means that optimum use has not been
made of available resources to spend these where they
are desperately needed. However inadequate, we
nevertheless welcome the increase in the deficit:GDP
ratio to 2.3% for 2001/02, 2.6% in 2002/03, although
it again falls to 2.4% in 2003/04 and 2.2% in 2004/05.
The upward revision of this year's target, for
example, will free up over R3 billion for additional
spending.
The People's Budget believes that there is further
scope for moderate increases in the deficit. If these
resources are then invested productively in building
social capital and improving infrastructure, the
medium- to long-term yields will more than justify
this flexibility.3
On the revenue side, despite the welcome, although
modest, increase in the revenue: GDP ratio, the
proposed level is still well below South Africa's
taxable capacity. This unnecessarily limits the
resources available for spending. Every percentage
point increase in the revenue: GDP ratio would free up
approximately R10 billion to finance additional
expenditure.
Econometric and tax effort analysis has indicated
that there is considerable scope for increasing this
ratio. Many countries in South Africa's income bracket
have ratios of over 30% tax: GDP, as compared to ours
of 24.5%.
It is worth noting that revenue targets have been
consistently overshot for the last few years. We
welcome SARS's efforts in closing tax loopholes,
cracking down on tax evaders, and broadening the tax
base. However, Treasury's consistent underestimation
of revenue collection has the effect of contributing
to overly contractionary fiscal policy. Revenue which
is not budgeted for is then not allocated to delivery;
rather, it ends up reducing the budget deficit more
than what had been initially tabled. The pessimistic
revenue estimates thus limit resources available for
spending. They persist in doing this despite this
problem being highlighted in previous years.
Together with under spending by key departments,
this goes a long way towards explaining the trend of
the past few years of actual deficits being even lower
than had been planned. It is surely time for
government to start factoring more realistic
collection targets into the budget, so that these
resources can be channelled to delivery.
When compared against the scenarios set out by the
People's Budget for fiscal expansion and economic
growth, the Draft Division of Revenue Bill is not
nearly as expansionary as what we believe to be
appropriate. We would have wanted to see the deficit
GDP ratio going up to the region of 4%, and the
revenue:GDP ratio going up to about 30%. Not only
would this allow considerably expanded expenditure,
but projections indicate that it would be conducive to
higher and sustainable growth rates.
Specific areas
of expenditure
As noted above, the spending plans contained in the
Draft Division of Revenue Bill are certainly a
moderate improvement on the budgets of recent years,
and contribute towards meeting social and economic
needs. These shifts permit substantial real per capita
growth in spending on health and welfare. Still, in
real terms, per-person spending has not yet caught up
with 1996 levels. Higher levels of social and
infrastructural spending are needed to compensate for
the "lost years" of fiscal austerity and to put South
Africa on a new growth path.
We will not at this point be analysing the
provincial allocations and conditional grants set out
in the Draft Division of Revenue. Instead we reiterate
some of our comments made in response to the MTBPS
which have a bearing of the expenditure aspects of the
Draft Division of Revenue.
Social spending
The report of the Committee of Enquiry on
Comprehensive Social Security for South Africa is due
to be released soon. Whatever its specific
recommendations, there will no doubt be significant
fiscal implications. While welcoming the increased
welfare expenditure proposed in the MTBPS, this would
clearly be inadequate to support the introduction of a
comprehensive social security system. Of particular
concern for the People's Budget is that the health and
welfare budgets will not be sufficient to support the
introduction of a National Health Insurance or a Basic
Income Grant.
There should be an understanding that, subsequent to
the Committee's reporting and processes arising from
this, the welfare allocations in the MTEF period will
need to be fundamentally revised. We note the Minister
of Finance's acknowledgement that the has not
attempted to anticipate the report of the Committee of
Enquiry. The People's Budget will be particularly
eager to see sufficient expansion of the health and
welfare budgets to support the introduction of a Basic
Income Grant and a National Health Insurance scheme.
We do welcome the commitment to protecting the real
value of welfare grants in future, after several years
of real cuts. Their level however remains inadequate.
There needs to be provision for real increases,
particularly given their critical role in protecting
the poor and vulnerable.
Even with the intention expressed in the MTBPS to
double the number of children receiving the Child
Support Grant (and the objective in the Draft Division
of Revenue to increasing its uptake), this would still
mean that less than half of intended beneficiaries
would be reached. In general it is those children most
in need of this grant who are not receiving it,
whether because of a lack of information, not having
the correct documentation, or not being able to
overcome the bureaucratic hurdles of meeting the means
test. For example the poorest provinces, whose
children desperately need social protection, actually
have the lowest take-up rates. This clearly
demonstrates the need for a more comprehensive and
universal system of social security.
The "integrated HIV/AIDS strategy", and its funding,
is inadequate. The People's Budget has called for
additional spending both in terms of prevention and
treatment. This would include funding increased condom
distribution, as well as awareness raising, and the
provision of treatment to prevent mother to child
transmission and to improve the quality and length of
life of people living with HIV/AIDS.
Education spending overall is expected to fall
slightly each year on a per capita basis. This is of
great concern given the widespread acknowledgement of
the need for increased investment in education and
skills development.
Economic services
In terms of economic services, we endorse the
commitment to increased infrastructure spending and
the small real growth in the agriculture and
transport/communication functions. This should have a
positive effect both on people's quality of life and
on South Africa's economic growth. However, we are
very worried that the overall water budget is being
cut in real terms, with no reason given. Water is an
absolute basic need and is critical for health as well
as for any type of productive activity.
We urge government to ensure that funds allocated
for infrastructure are indeed spent. Treasury itself
has noted the poor spending record in this area. For
the intended positive effects of these increased
allocations to be realised, it is obviously critical
that strong and co-ordinated efforts are made to
ensure that infrastructural investments do indeed take
place.
The People's Budget also believes that government
taking direct and active responsibility for
infrastructural projects will be more conducive to
effective expenditure. Collaboration with the private
sector has been plagued by spending problems, as we
show in greater detail below. The People's Budget
therefore calls for government to play a more central
and active role in the delivery of infrastructure and
basic services. This would not preclude some limited
involvement of the private sector, under tightly
regulated conditions, where it would clearly
facilitate access to better services.
Under
spending
Examining recent experience of under spending
indicates that where under spending occurred, this was
mostly in cases where the programmes involved aimed at
providing funds to small businesses or otherwise
involving the private sector. In contrast, the big
social service departments had not had major problems
in spending their budgets where this has been through
their normal delivery systems.
It was recently reported that the Department of
Water Affairs under spent its budget by 75% in the
first half of this year. The Minister of Water Affairs
and Forestry attributed this in part to strict
treasury regulations. The Director General of Water
Affairs also pointed to problems which the Division of
Revenue Act has created for line departments
attempting to deliver services and meet backlogs.4
Fiscal control mechanisms must be rigorous enough to
deter waste, corruption and mismanagement without
erecting unintentional or unnecessary barriers to
service delivery – especially for poorly-capacitated
provinces and local authorities. If particular
regulations or procedures are inhibiting vital and
legitimate spending, then these should be reviewed and
revised. While public concern over under spending is
entirely justified, we must also be vigilant to ensure
that government projects are sustainable and capable
of achieving genuine development.
Our key proposals for improving spending are:
Revamping conditional grants through overhauling the
treasury regulations and building capacity;
A greater reliance on the state itself to directly
deliver services and infrastructure, rather that
contracting this out; and
Transforming the procurement system. Currently,
tender procedures are extremely time-consuming, do not
facilitate the acquisition of policy advice and
research services, and fail to ensure adequate
representation of and support for small and micro
enterprises.
FFC Recommendations and Treasury Response
The Costed Norms
Approach
The FFC has recommended a shift to a costed norms
approach. Treasury is critical of this approach in the
Explanatory Memorandum (and in previous documents).
The costed norms approach has been summed up by the
FFC as "a formula-base method for calculating the
financial resources necessary for the provision of
basic social service levels, given nationally mandated
norms and standards." 5
The FFC proposed a budgetary methodology whereby
"the mandated basic level of service should be
determined nationally and should be expressed in terms
of norms and standards for each programme area"; and
hence "against the norms and standards established,
fiscal requirements should be determined by taking
account of factors affecting provincial conditions."
The FFC argued that this paradigm would hold various
advantages, notably the promotion of more efficient
resource allocation choices by provincial governments;
the provision of an incentive to provincial
governments to achieve output goals; increased
transparency; improved incentives to gather data on
government performance and costs; contributing to
determining appropriate fiscal policy; and limiting
the reallocation of grants by provinces in ways that
are inconsistent with national objectives.
Treasury does acknowledge that the division of
revenue should take account of constitutionally
mandated obligations, and that constitutionally
mandated basic services and other constitutional
obligations should be prioritised and progressively
implemented. However certain reservations with the
costed norms approach are raised, including that it
would introduce "moral hazards" for provinces by
encouraging them to increase or distort costs or
funding levels; that policy norms used to develop cost
estimates could be ambitious and unaffordable and
generate unrealistic expectations for additional
funds; and that a large portion of the required
information is not yet available.
The People's Budget has in the past criticised a
fiscal approach which takes macroeconomic parameters
as a given and allocates these resources to various
functions, irrespective of whether or not these
resources are adequate to meet people's needs or even
sufficient to carry out stated government policy. This
approach has had various negative ramifications. While
some advances have been made in addressing social
backlogs and constantly arising new needs, this has
been at a slower pace than would have been the case
with more expansionary and flexible macroeconomic
parameters, notably with respect to the budget
deficit.
Such an This contractionary fiscal approach has also
contributed directly to the problem of unfunded
mandates, where lower organs of state are given
various responsibilities without being allocated the
necessary resources to carry these out. Such a
situation is an outcome of both poor planning and of
the determination of allocations on the basis of
macroeconomic objectives without adequate reference to
actual resource requirements.
The People's Budget has instead motivated for an
approach to budgeting in which programmes inform
budgets, in line with a growing consensus across the
developing world. This aims to ensures that the
strategic objectives of governments are reached.
Within this, there is a recognition that some limits
will always be present. The shift in emphasis from
reaching fiscal targets to linking plans to budgets
can assist in quantifying meaningful outcomes. We have
proposed that the budgetary process should start by
attempting to quantify the remaining social backlogs,
calculating the resources needed to meet these
backlogs, and from there develop short, medium, and
long term strategies for financing the eventual
elimination of backlogs. We thus strongly welcome the
starting point of the costed norms approach, namely a
commitment to meeting the state's constitutional
obligations in terms of service delivery, and the
recognition that fiscal policy needs to be responsive
to and accommodating of this.
A costed norms approach could also potentially
improve the democratic and participatory nature of the
budget process. Ideally, acceptable norms and
standards should be determined not in an abstract,
academic manner but on the basis of people's needs. It
would be an empowering experience for communities to
be given the opportunity to define their own needs and
priorities and for this to be fed into the process.
We believe that the costed norms approach will also
be favourable in terms of equity issues and the
distribution of resources in favour of poorer
provinces. In particular, the acknowledgement there
are differential costs between provinces which are
beyond the influence of provincial authorities (for
example, economic and social conditions in a province,
which result in higher rates of disease, will increase
health costs). Having this recognition built into the
formula is likely to work in favour or poorer
provinces.
Clearly however, the costed norms approach is no
"miracle instrument", but an integral part of an
overall system. We also note that for a costed norms
framework to be successful, it will need buy-in from
all stakeholders and particularly all relevant organs
of state, further refinements and concretisation if
necessary, as well as an intensive effort towards the
gathering and analysis of all required data. As the
FFC has noted, the costed norms approach can add value
immediately and then be improved on over time.
We do also note Treasury's concerns in terms of
adequate and accurate information needed for the
successful implementation of a costed norms approach.
The People's Budget would see this as a process of
moving towards such an approach. Treasury should table
a plan, with timeframes, for providing or accessing
such relevant information.
The nub of the issue in practice may come arise in
terms of the "iterative process". This was defined by
the FFC report as "a part of the procedure for
dividing national revenue suggested in [the FFC]
report, in which policy makers alternate repeatedly
between adjusting a costed norms scenario and
adjusting macro-priorities set by the MTEF, until a
solution is found that brings norms into alignment
with the MTEF". Our concern is that in adjusting norms
to fit the MTEF – rather than the other way around –
the norms and standards identified may become lost in
the course of the iterative process and budget
allocations may end up not much different from what
they might have been in the absence of a costed norms
approach.
The People's Budget does acknowledge the need for
some mechanism of reconciling the resources needed to
meet social and economic needs with an overall
macroeconomic policy. Without some way of adjusting
the resources required to meet people's needs,
macroeconomic management would be very difficult and
there would be potential for excessive fiscal
expansionism and macroeconomic instability. So whilst
we agree on the need for some type of iterative
process, we are recommending some modifications of the
FFC proposal.
The FFC proposes the establishment of basic social
service levels, expressed in the form of norms and
standards, for each programme area. There is obviously
a degree of subjectivity involved in defining these
levels, and actual levels will be further determined
through the iterative process. The FFC recommends that
alternative national benchmarks be designed, from
which national government could choose. It argues that
these alternatives would offer a "menu of alternative
realisation rates and policy parameters", both in
terms of possible norms and standards and about
different provincial shares in the vertical division.
Such an approach would make explicit the trade-off
between different possible levels of national norms
and standards, and other fiscal priorities of
government.
What the People's Budget proposes with respect to
this is that the FFC costs at least two levels of
service delivery, as follows:
Minimum Norms: the basic level of norms and
standards which would have to be met in terms of the
state's (most basic) constitutional and other
obligations, legislated policy objectives, and a
minimum acceptable standard of living.
Preferred Norms or Intended Norms: these could be
one or more menus of service delivery above the
standard of the minimum norms.
These different levels would be costed and the
actual standards chosen (with their concomitant cost
implications) would ultimately be a political
decision. Whilst the actual level agreed upon may well
fall in between the Minimum Norms and the Preferred
Norms as proposed by the FFC, they should not fall
below the floor of the minimum norms. This proposal of
the People's Budget is intended to avoid a situation
where, in the course of the iterative process,
macroeconomic parameters squeeze the norms and
standards to an excessively low level such that the
costed norms approach is rendered meaningless.
Furthermore, for a costed norms approach to be
effective, in the long term this paradigm would need
to be extended to all spheres of government rather
than just the social sector at the provincial level.
In the interim, a situation needs to be avoided of
distortions and crowding out, which could potentially
prejudice certain functions and spheres to which the
costed norms approach is not applied (such as the
crucial area of economic services).
The FFC has not taken the rationale of the costed
norms approach to its logical conclusion: and
explicitly recommended the adjustment of macroeconomic
parameters in order to fund identified norms and
standards in terms ofbased on inter alia the state's
constitutional obligations obligations to deliverin
services delivery. Final decisions around economic
policy are ultimately the decision prerogative of
government. , and wExtending the logic of the costed
norms approach would imply some flexibility in
macroeconomic policy.
Lifeline Tariffs
Treasury also responds to a FFC recommendation around
lifeline tariffs and cross-subsidisation of service
delivery. The response expresses some scepticism and
reservations around a subsidisation approach. The
People's Budget is concerned that, two years after
the commitment was made to free lifeline services
and progressive block tariffs, only certain pilot
projects have been implemented.
It will be crucial in the coming year to implement
free basic services on a more comprehensive scale.
This will require adequate provisions in the 2002
Budget to fund these services through national subsidies,
to supplement the cross-subsidies built in through
the progressive block tariffs funding model.
Democratising the Budget Process
One of the problems which led to the establishment
of the People's Budget was the lack of transparency
and opportunities for meaningful participation in
Treasury's budget process. We are dismayed about the
continued absence of legislation to empower Parliament
to amend money bills, as required by the Constitution
(at s77). The spirit and letter of the Constitution
expressly states that an important aspect of South
Africa's democracy is the transformation of the highly
secretive and centralised budgetary process inherited
from the apartheid regime into a more open and participatory
process.
The ANC Elections Manifesto also contained a commitment
to ensure that elected representatives in national,
provincial and local spheres have the appropriate
powers to shape budgets. However, yet again, when
this year's budget is tabled elected representatives
will not have the opportunity to meaningfully engage
with it.
Over and above the legislative challenges of democratising
the budget process, there is a need for increased
participation – of parliament, Nedlac, and society
at large – in the budgetary process.
Through the involvement of the affiliates of our three
constituent organisations – churches, NGO's and trade
unions – as well as other elements of civil society
outside of the coalition itself, we have attempted
to bring broader voices into the determination and
articulation of budget priorities in the People's
Budget. In February, we will be presenting an expanded
and revised People's Budget document. We hope that
the proposals contained in that document will serve
as the basis for further engagement with government
to strengthen the budget's capacity to eradicate poverty,
create quality jobs, and meet the needs of all of
our people.
1. Discussed further in section 5
below
2. More detailed proposals in each
of these areas were set out in the document released
by the People's Budget in February 2001 (available
at COSATU's website, www.cosatu.org.za).
3. In the document released by the
People's Budget in February 2001, three economic scenarios
were explored in which deficit and revenue parameters
were relaxed to differing degrees; gradual expansion,
moderate expansion, and rapid expansion. In each scenario
projections indicated that sustainable growth could
be achieved at a higher level than if the macroeconomic
parameters in the National Budget were followed.
4. Business Day 18 September 2001.
5. FFC (2000) Recommendations: 2001-2004
MTEF cycle p7.
March 14, 2002.
[Source: www.cosatu.org.za]
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