People's Budget
Comments on Draft 2002 Division of Revenue Bill and Explanatory memorandum
Table of Contents
- Introduction
- The people's budget
- Draft Division of Revenue
Overall macroeconomic analysis
Macroeconomic parameters of the Draft Division of Revenue
Specific areas of expenditure
- FFC Recommendations and Treasury Response
The Costed Norms Approach
Lifeline Tariffs
- Democratising the Budget Process
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.