Medium Term Budget Policy: report by committee

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Meeting Summary

A summary of this committee meeting is not yet available.

Meeting report


13 November 2001

Relevant documents
Medium Term Budget Policy Statement 2001
Committee Report on Medium Term Budget Policy Statement (Draft - see Appendix)

The Committee made a few minor changes to the Committee Report and adopted it.The DP indicated that while they have no differences with the Report, they do have some concerns and would be abstaining. The reasons would be provided in the National Assembly debate on the Committee report.

Dr Conroy (NNP) suggested that the long sentences be looked at because sometimes it was difficult to follow. The members agreed with Dr Conroy.

Mr Theron (DP) referred to the Committee's recommendations in the Report and said that there should be one that states that DTI should look at spending on small and medium size enterprises because it is a policy of government and we have heard in this Committee how important it is.

Mr Baloyi (ANC) said that Mr Theron concerns were covered in recommendation 2.

Mr Hanekom (ANC) replied that it can be argued that it is covered but there was an emphasis on the need to support SMEs and it warrants specific inclusion.

It was agreed that it would be included in the final version.

The Committee Report on the MTBPS was put to the Committee for adoption.

Mr Louw (DP) indicated that the DP would abstain from voting on the Report because they have areas of concerns. Mr Andrews would give reasons in the House.

The other members all voted to adopt the report.

Joint Budget Committee Report on 2001 Medium Term Budget Policy Statement (Draft)

The terms of reference for the establishment of the Joint Budget Committee were to:
· "Analyse and debate the 2001 Medium Term Budget Policy Statement
· Conduct hearings on the Medium Term Expenditure Framework and the division of revenue bill; and
· Engage in the Budgeting process throughout the budget cycle in order to allow parliament to have an input during the drafting stage of the budget"

The Joint Budget Committee was formed on 30 October, the same day the MTBPS was tabled in the House. In the effort to interrogate the spending priorities of national departments, as outlined in the MTBPS, the Joint Budget Committee invited the following participants:
· National Departments as mentioned in the MTBPS
· Civil Society
· Business leaders
· Chairpersons of Portfolio and Select Committees

The Intergovernmental Fiscal Review formed a basis for the discussion of the Division of Revenue.

The broad policy priorities of Government over the Medium Term Expenditure
Framework is the 'reduction of poverty to alleviate inequality and vulnerability'. The
context in which this can be achieved is through the following priorities of National
Government as listed in the MTBPS:
· "Continued emphasis on investment in, and maintenance and rehabilitation of infrastructure, enhancing South Africa's job creation and economic growth prospects over the medium to long term"
· "Strengthening programs that address the impact of the HIV/Aids epidemic'
· "Rebuilding Local Governments and meeting commitments to ensure free basic service delivery"
· "Strengthening capacity in the safety and security sector to prevent and combat crime"
· "Restructuring national entities, specifically the Unemployment Insurance Fund and the SA Post Office, enabling them to improve the quality and access to service delivery"
· "Further strengthening of tax administration capacity and establishing a financial intelligence centre to assist global efforts in combating money laundry"

South Africa's Macroeconomic Environment
Government's commitment to budgetary restraint over the past five years, has produced a reduction in borrowing and debt service costs, the increase in investor confidence leading to increases in gross domestic fixed investment which will facilitate strong real growth in spending over the next three years while still maintaining a sound and sustainable fiscal policy stance. In addition, improved efficiency in revenue collection has improved tax compliance and tax morale, resulting in additional resources to reduce government debt and provides room for tax cuts.

Benefit of the Depreciating Rand
The depreciating Rand to the dollar has benefited the economy, mainly in encouraging higher and more diversified exports of manufactured goods and services, leading to the increase in competitiveness of our exports and sustaining growth. However the drawback of a depreciating Rand raises the cost of importing technology and other services to maintain a competitive advantage in the export market.

Resilience of the Economy contributing to relative growth
The current momentum in economic growth places South Africa in a rather comfortable position to respond to the downturn in the world economy with an appropriate mix of tax relief, accelerated infrastructure spending and further capital expenditure on social services and municipal infrastructure providing real growth in public spending. The release of the European commission report on South Africa indicates that trade is up 35%, in Rand terms, with the slowdown in the European economy not expected to be as big as the United States. The United States is expected, after 11 September attacks, to begin substantial public spending, and with a series of interest rates cuts to stimulate growth in their economy, should improve the economic outlook for next year. The European Union has already started implementing monetary and fiscal policies to stimulate growth leading to further demands in our export market. Further increases in stability and confidence in our economy is expected to come from an anticipated upgrading of our credit-worthiness from Moody's next year. This will also result in increased fixed investment and reduced borrowing cost.

Tax Policy and Administration
The restructuring of SARS along with other tax reforms has enabled more revenue to be collected at a lower tax rate contributing to both the steady improvement in the fiscal position and further tax relief. Two most significant changes to the tax structure have been the change from a source-based tax to a residence-based income tax with the introduction of capital gains tax. Residence-based income tax adds to the fiscus by taxing the foreign earnings of South Africa companies and individuals.
Capital gains tax remedies a fundamental deficiency in the income tax regime thereby improving the overall equity and efficiency of South Africa's tax system.

As part of the drive to stimulate growth in the economy by creating jobs, a wage incentive aimed at encouraging the employment of learners has been introduced. This wage incentive is set to encourage job creation by reducing the cost of hiring new workers and to increase the skills base by offering learnerships. It is also to encourage the formalisation of the informal employment sector, which will see further contributions to the UIF and other government programs, ultimately benefiting the workers.

Improvement in Savings and Investments by National Government and Households
The monetary and fiscal policies pursued by government have resulted in declining interest rates. Inflation targeting by the SA Reserve Bank in the band of 6 to 3 per cent has led to certainty for investors. Low inflation results in more disposable income benefiting poor people. Both investments and savings in our economy have shown signs of recovery with gross domestic saving rising from 14.3 to 15.3 per cent of GDP from 1998 to the first half of 2001. Declining interest rates and inflation is expected to accelerate gross fixed capital formation contributing to growth in our economy, rising from 2.6 per cent in 2001 to average 5.3 per cent over the next three years.

Fiscal Policy
The 2001 Budget announced a change in fiscal policy from an environment where the focus was on reducing the deficit to one that decidedly contributes towards economic growth. Continuing with the trend, the 2002 Budget is expected to announce a further acceleration in public spending, especially on capital infrastructure and provides room for a reduction in tax rates, especially to low and middle-income workers. This more growth-oriented fiscal policy is possible because of a healthy fiscal position and declining debt service costs. Government will continue to moderate its borrowings in order to reduce debt service costs and interest rates in the long-term.

Medium Term Expenditure Framework
In keeping with the budget theme for next year - 'Reducing Poverty, Inequality and
the following section outlines how departments are responding to
Governments priorities in the way in which the policies are changing and the 2002
budgets are being put together.

Restructuring National entities
The Joint Budget Committee supports the additional allocations for the restructuring of the SA Post Office over the MTEF period, but caution that they should become self-sustainable in future, while retaining their social responsibilities to deliver services to previously under-served areas. The operational loses incurred by the S.A Post Office can in part be attributed to the failure of the strategic management partner, poor financial management and corruption. Furthermore, the extension of services to areas not covered is not compromised.

Another spending pressure over the MTEF arises from the past policy and administration of the UIF, which has resulted in poor funding mechanisms to deal with increased levels of unemployment. A turnaround strategy by the Department of Labour was designed to ensure that the Fund becomes sustainable in future. Extending coverage to high-income earners whose contribution will cushion reserves, as they are less likely to lose their jobs and claim unemployment benefits will ensure this objective. The use of a sliding scale for paying out claims will also help in this endeavour. In addition, funds are collected from all employers who make deductions, and SARS is now responsible for collections. The collection and benefit of the fund has furthermore been extended to farm and domestic workers whose sector is more vulnerable than those in permanent employment. Installing a computer based database system should facilitate this turnaround.

Poverty Alleviation
The key objective identified in the MTBPS, is poverty alleviation to reduce the burden on the most vulnerable members of society. Social Development is the one area that government can directly attempt to eradicate poverty. The Department of Social Development has taken a step toward eradicating poverty by implementing a poverty relief programme. This programme will focus on food, security, income generation, youth development, micro financing and the integration of people with disabilities. In its contribution this programme supports employment of more women in construction to generate income for their own means of survival. From the Heath department's side, there is huge investment in the school-feeding programme that provides nutrition to those in poorer communities.

The poverty relief fund provides further benefit for projects aimed at alleviating the plight of rural poor, women, youth and the disabled. Funding of R1.5 billion is available for projects that address water resourcing, waste management, creating infrastructure and protections of water resources. Infrastructure projects underway include crèches, community facilities, access roads, community gardens and water supply projects.

The department of trade and industry has also highlighted the need for the increase in quality of raw materials produced to ensure competitiveness of South African exports. Examples mentioned were the improvements needed in the quality of leather produced for the motorcar industry in order to ensure exportable quality. The department is also involved in advising SMMEs and entrepreneurs to become more competitive by producing goods that are of a high quality and standard

Social Services Cluster
The Social Services Cluster forms the backbone to the MTEF as outlined in the MTBPS. The various departments in the Social Services Cluster have all committed themselves to undertake an institutionally integrated approach to increase the infrastructural capacity to deliver on social services through, in some instances, jointly co-ordinated projects.

"Education and training are long-term investments that lay the foundation for an improved quality of life through increased skills and capabilities", conferring a positive externality in the sense that the benefits spill over to the entire population. An educated labour force is much more innovative and can bring about technological advancement, which will eventually contribute to growth.

Within the social services cluster, the department of education has its emphasis on the following objectives: equity, efficiency, quality and accountability. Priorities include HIV/Aids, Early Childhood Development (ECD) and school effectiveness. The department is specifically focusing on ECD, since they believe that it addresses the needs of the poor. The allocation of resources for early childhood development is particularly welcomed by the FFC.

A lack of investment on maintenance has been identified in provincial education departments and the number of schools that need repairs still remains high. The national department of education has established a directorate for physical planning to look into the spending rates of various provinces.

Capacity Problems
One of the challenges facing the department of Education, is the lack of capacity to convert money into resources e.g. buying learner support material or building classrooms. It is often found that the provinces do not know how to spend the money in a timely and cost effective way. This problem usually exists because of poor planning at the management level.

The spread of HIV/Aids is a challenge to society and Government at large. The National Integrated Plan (NIP) includes resources available for implementing programmes available to the departments of Health, Social Development and Education. This program is also linked to the poverty reduction strategy. The NIP is lead by the Department of Health and is aimed at spending money on prevention priorities, expanding home-based care and community-based care program, life-skills programming schools and voluntary counselling and testing. In terms of the Education department, rollovers are used to pay HIV/Aids officials that will be appointed to work on projects relating to HIV/Aids.

The FFC highly commends the additional allocation of resources for the integrated strategy against HIV/Aids - R320 million to R422 million over 2002/03 to R546 million 2004 - to strengthen home and community based care, support voluntary counselling and testing and strength life-skills programmes in schools but has reservations of including this has part of the equitable share because HIV/Aids and other disease associated with it may be covered in the PHC sector budgets.

The child support grant has been extended to reach 3 million beneficiaries by the end of 2002/03. Despite available funding, problems persist e.g. children not getting support from the grant money because their foster parents misuse the money. This leaves the social development department to work together with the Department of Home Affairs to make sure that the applicants have the necessary and valid identity documents and birth certificates when they supply for grants. This departmental co-operation can also speed up the application processes.

Even though additional resources have been made available for increases in child support grant and other grants the FFC fears that the budgeted values - 2000 values were used -would underestimate the demand placed on these grants, especially the foster care grant.

On the housing front, the change in focus from quantity to quality of housing has slowed down the delivery process. In addition the department needs to develop a proper planning and relocation approach as well as focus on the integrated rural development and urban renewal plans for future developments.

Co-ordination Between departments
In the administration services cluster the department of home affairs has placed itself in a position to facilitate the integration of all departments - Health, Police, etc as well as the Department of Labour (UIF) to ensure effective delivery of services, enabling access to pension funds, UIF and to welfare grants. The proper financial management system should be a priority for the department i.e. a system to give all details about an individual when applying for grants, identity documents, UIF etc.

With the inheritance of infrastructure backlogs especially prevalent in housing, health, education, the government has undertaken to increase spending on infrastructure maintenance, rehabilitation, and construction to provide the necessary microeconomic framework, complementing the already macroeconomic achievements, to bring about an integrated departmental approach to sustain and support the delivery of public services.

Protection services cluster
The objective of an integrated justice system comprising police, justice and correctional services, defence is pivotal in stabilising crime levels and promoting growth in the country. Evidence presented to the Joint Budget Committee attested to the fact that integration of policy priorities and budgetary allocation is a crucial factor within this cluster. In order to 'strengthen capacity in the safety and security sector and to prevent and combat crime the budgetary allocation will grow by 7,2 per cent annually over the medium term.' The committee noted that a key part of the hearings was devoted to personnel issues and salaries across the cluster.

Skills Development and job creation
One of the key issues for the Department of Labour is sustainable job creation in accordance with the Job summit commitments agreed to in 1999, through special employment programs, integrated provincial projects, sectoral job creation and human resource development. The Skills development levy is largely used to achieve this objective.
In addition, the department aims to instil ordinary citizens with the necessary skills through Sectoral Education and Training Agencies (SETA's) required in the job market. Another challenge for the department is the training of people for these programs, especially in rural areas.

Division of revenue
The committee considered a report on the vertical transfer of funds from national to provincial and local governments. The spending priorities of government, with respect to provincial and local government encompasses social services spending on the provincial side and provision of basic services to local government. In line with this, government adjusted the vertical share of the spheres of government to enable execution of these priorities. In order to achieve equity, revenue is divided horizontally by means of unconditional grants (equitable share) and conditional grants. In addition, local governments have undergone major restructuring, in order to deliver efficient services and some of this cost burden is being met from nationally raised revenue.

Some concerns raised by the committee includes the fact that these grants may not be sufficient to address the challenges ahead of local government. Some thought needs to given to increasing their share of the equitable grant. Whereas a previous concern was the flow of funds to local governments, the challenge currently is the under spending of funds. Second, is the lack of capacity that still exists within some departments to spend allocated funds. In addition, the committee was of the opinion that the mind set of local governments should be changed to include three-year budgets and spending priorities, in order to ensure sustainable spending, providing that the necessary spending capacity is available. This in turn, will lead to the improvement and an increase in municipal infrastructure, in line with government's priorities. In addressing the capacity problem, more information needs to be provided to the national Treasury on spending measures in order to have pro-active strategies to deal with under-spending, as this could lead to lack of growth and non-delivery of services, in direct opposition to government's priorities. More co-operation between different spheres of government will ensure that local governments take ownership of functions assigned to them, for instance to make sure that affordable service charges accompany provision of low cost housing by national government to the lower-income groups. Finally, the committee is of the opinion that the rural development and urban renewal strategies should be vigorously pursued by provincial and local governments,, through co-operative governance and a sound infrastructure planning.

Provinces and municipalities are the service delivery agents of government and it is all the more important that they be capacitated to adjust their spending priorities to be in line with that of national government. Whereas provinces receive most income (95%) through national transfers i.e. the equitable share and various unconditional grants, municipalities have the ability to generate up to 90% of their own revenue. This capacity depends on their respective tax bases and varies for Category A, B and C municipalities. Some financial assistance is thus required for local government in particular where major restructuring has taken place in the amalgamation to 284 local governments in order to meet spending priorities. This was done with the aim of delivering more efficient and effective services across boundaries, particularly to areas lacking in infrastructure and service delivery. The provision of services to communities, promoting social and economic development and infrastructure development, should be done in a sustainable way, and also involve the community organisations. Due to varying tax bases between municipalities resulting in lack of capacity, there is often a tendency for some municipalities to be unable to spend their funds. It therefore becomes important for provincial and national government to intervene and support the local government to address, service backlogs and improve service delivery. Once all these structures are in place, municipal managers should then be held accountable for non-delivery of services, arrears in payment, deficits, corruption and the non-reporting of information.

The other way of improving the service delivery and eradicating poverty is by (PPPs), Public-Private Partnership, whereby the public departments are joining together to increase the capacity and skill transfer to explore the necessary opportunities and improving the infrastructure. The Provincial and Local department is implementing Integrated Development plan (IDPs) to assist municipalities and direct the resources towards the key policy priorities and monitoring the performance management. The considerations of the Integrated Sustainable Rural development Programme (ISRDS) which is pledging the support to the existing funding programme focusing on improving service delivery is necessary.

Another concern was the remuneration for councillors would have a negative impact on service delivery. If councillors are not paid well it will have negative impact on service delivery. There are few HIV/AIDS program at local government level. With regards to the cut in the equitable share, ministerial committee is looking at review of a split, vertical, horizontally. Another concern was that in terms of the co-ordination of departments. It was said that there currently is no funding for B's and Cs but on an interim basis the department tries to ensure that the B's and C's end up coming up with a sharing arrangement. The use of the equitable share from a concern was just where the money is supposed to come from. The money from free basic services comes from municipalities and additional funds provided by the fiscus, to add to the equitable share.

SACOB fears that the financial weakness, vulnerability and fiscal sustainability of local government acting as the final delivery vehicle for most social projects by the various departments of national government would require greater fiscal consideration and contingency planning.

Minister of Finance's response to inputs of the Budget Committee:
General observations on inputs
· Most input were supportive of growth-oriented budget statement
· Some people argue for faster growth and others for less borrowing and tax cuts
· The 2002 budget provides a balance that will contribute to strong growth on
infrastructure and social services, as well as tax relief, mainly for low and middle-income workers.

The current economy
· Although the global economic slowdown will affect our growth negatively, we are still projected to post positive real growth in the economy, due to:
· Strong fiscal position provides room for fiscal policy as a growth stimulant
· The export sector is performing well, due to competitive currency
· Inflation is on a downward trend and we have not had to hike interest rates or run up foreign liabilities, as was the case in 1998.

Fiscal policy
· Fiscal framework makes provision for strong real growth in spending for next year.
· Frameworks creates room for tax cuts to stimulate expenditure on consumption
· Limitations to borrowing and low interest rates will make growth in spending more sustainable.
· PPP's and regulatory reform can be used stimulate capital invest and job creation
· An increase in the deficit to 2.6% is projected.

Tax policy
· No major tax reforms in 2002
· Tax cuts will aim to stimulate consumer demand; lower employment cost and improve overall progressivity and fairness of the tax system.
· During 2002, government will review Retirement fund taxes, Public benefit organisations and specific sectors where the effective rate is low

The spending framework
· Top priority in 2002 is given to reducing poverty, inequality and vulnerability
· Other priorities are increased spending on health services, social grants, municipal services, infrastructure, policing and admin services, strengthening of programmes tackling HIV/Aids
· Government must improve the quality of spending
· Situation of under-spending is improving signalled by Government capital formation grew in the 1st half of 2001, the size of roll-overs is declining and conditional grant mechanisms are changed to aid spending

Intergovernmental finances
· Growth in local government share caters for extension of services to those presently excluded, provision of free basic services and costs of governance in fiscally weak municipalities
· Transformation of local government should improve the level of efficiency and quality of services to the poor.
· Provincial share rises to accommodate social grant take-up and inflation related increase in grants, programmes to fight HIV/Aids, Early childhood education as well as the acceleration of spending on infrastructure

The minister said that: "hearings conducted in the Budget Committee are very positive development and that inputs and comments made will be factored into the 2002 Budget."

Comments and recommendations of the committee
1. The committee supports the underlying theme of the 2002 budget of addressing poverty and vulnerability. The committee further agrees with the major priorities of the government and the expansionary nature of the budget. It proposes to release funds to deal with the social problems affecting the poor while at the same time it stimulates economic growth and job creation over the medium to long term.

2. The committee is concerned with the lack of capacity to spend where services are delivered. While there are improvements, the government must put measures in place to deal with these urgently. The committees of Parliament must play a role in monitoring this. The committees of the various legislatures must also utilise scrutinise and monitor the monthly expenditure figures released by the treasury on a continuous basis and hold departments accountable in accordance with PFMA. This should limit the rollover of funds and reduce under-spending.

3. The budget committee is concerned with the levels of co-ordination between the government departments despite the cluster approach of ministries at a national level. This is more visible in the government capital projects with the resultant rollovers. The committee thus, recommends the intensification of better co-ordination at all levels, better planing at local level and the utilisation of PPPs (public-Private-partnership) to enhance delivery, provide skills and expertise where necessary. However, there needs to be proper regulations of these PPPs in order to avert problems as we experienced in the post office.

4. The lack of financial services in the rural areas is of concern as such services are crucial for rural development. Government is urged to explore possible mechanisms for financial services to reach poor areas and The Post Bank is one option for such a service.

5. Co-ordination for maintenance and infrastructure between public works and other department is necessary for maintenance and roll-out of Capital works programs of departments.

6. The portfolio committee on provincial and local government added the following comments on the hearings
· Adequate resources are needed to overhaul local government structures
· 36% growth is needed for capacity building in municipalities
· Infrastructure spending at local government level has increased, but is still inadequate.
· The ability of local government to deliver sustainable rural development and urban renewal strategy should be monitored.

7. In future, it is recommend that the department should make presentation as a cluster to improve co-ordination within sections.

The committee would like to thank all participants in the MTBPS hearings as this will assist Parliament in their oversight role and further assist in contributing to the budget process.

Appendix 1
The following stakeholders participated in the hearings on the MTBPS

Finance, Labour, Communications, Public Enterprises, Trade and Industry and Public Works

Deputy Ministers: Local Government and Finance

Deputy Directors General: Labour, Home affairs and Public Works

Director General: Communications, Public works, National treasury and Housing

Director: National Treasury

Chief Directors: Labour: Home Affairs and Economic Services and Infrastructure

Chief Financial Officer: Minerals and Energy

Civil Society: Idasa, The People's Budget, SACC, SANGOCO, COSATU, FFC, Fedusa,
SACCOB and Investment Economist from Standard Bank

Public Works

Appendix 2
ECD Early Childhood Development

FDI Foreign Direct Investment

FFC Financial and Fiscal Commission

HIV/AIDS Human immuno-deficiency virus/Acquired immuno deficiency syndrome

IDP Integrated Development Plan

ISRD Integrated Sustainable Rural Development

MTBPS Medium Term Budget Policy Statement

MTEF Medium Term Expenditure Framework

NGO Non-governmental Organisation

NIP National Integrated Plan

PFMA Public Finance Management Act

PHC Primary Health Care

PPP Public Private Partnership

SACOB South African Chamber of Business

SARS South African Revenue Services

SETA Sectoral Education and Training Authority

UW Unemployment Insurance Fund


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