Medium Term Budget Policy Statement Workshop

NCOP Finance

23 October 2011
Chairperson: Mr E Sogoni (ANC) and Mr C de Beer (ANC)
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Meeting Summary

The National Treasury presented a workshop on the budget processes to a joint sitting of the Parliamentary Committees on Finance and Appropriations. The Committee felt that it would be important for another workshop to be presented for all committees, to help them to understand the processes and the input that Parliament had into the process. 

National Treasury firstly explained the budgeting process in detail, which started and ended with political choices on priorities at the Cabinet lekgotlas. The three spheres of government needed to cooperate. It was explained that the Medium Term Expenditure Framework used a three year rolling budget system and Parliament now had input, because of the Money Bills Amendment Procedure and Related Matters Act (the Money Bills Act). Different entities were grouped according to the functions they performed. The process, and the months in which this happened, was outlined. The Mid Term Budget Policy Statement was also explained. A significant addition over the last two years had been the Budgetary Review and Recommendation Reports, which set out the issues raised by Parliament in respect of the performance of particular departments, whose recommendations were considered by the Minister of Finance. After these steps had been followed, Parliament would adopt the fiscal framework, and take a stance on the Division of Revenue and the Appropriation Bills, with or without amendment. Further refinements were made in January and the national budget, followed by provincial budgets two weeks later, would thereafter be tabled. Members were concerned that although Parliament played a large role, it was not specifically mentioned in the presentation. They raised the problem of fiscal dumping in the fourth quarter of the year, and asked for the difference between unallocated funds and disaster relief funds. They also questioned the rise in the compensation of public service officials, and wondered if this was justified, and questioned what unforeseeable and unavoidable expenditure would be.

A more detailed presentation was given on the Midterm Budget Policy Statement, and how the fiscal framework was determined. Fiscal policy was described as
effective management of revenue expenditure and debt within the dynamic global and domestic economic environment. The new allocations would be developed from a baseline, the allocation in the last budget, and this was done in consultation between the Expenditure Planning units and Fiscal Policy units. The growth to the baseline would represent inflation and economic growth. National Treasury would also determine where savings could be made, something that had been particularly important in the last two years. There was investigation into whether government was getting value and the best service delivery. The economic framework was updated through the macroeconomic forecast, which was updated each quarter. The Gross Domestic Product and Consumer Price Index inflation was explained. It was also necessary to look at revenue performance. In the last year, revenue had underperformed by R60 billion when compared to the National Treasury estimates. National Treasury participated in the Revenue Analysis Working Committee. National Treasury was trying to achieve a position where the fiscus would not have to fund the goods and services debt. The way the budget balance was determined was explained.

The last presentation outlined the Division of Revenue and Revenue Amendment Bill process. The Division of Revenue Bill dealt with allocations at the provinces. Once the fiscal framework was approved, the division of revenue and the appropriations would be approved as well. The allocations between the three spheres of government were explained, noting that National government took the largest chunk of revenue sources, such as income tax, VAT and customs duties, that Provincial governments had their own sources of revenue, but needed also to rely on the equitable share, and local government could generate their own revenue, and larger municipalities were able to do so. The Division of Revenue Bill (and, if necessary, Amendment Bill) was explained. The cycle was also set out, and it was noted that in-year monitoring was vital to ensure that money was correctly spent. The responsibilities of the transferring officer were set out, but National Treasury stressed that it would not help if money was transferred, but then had to be returned to the fiscus because it was unspent. It was important to look at provincial spending on personnel, and expenditure on infrastructure. Members noted that the same problems recurred on allocations each year, and enquired if past performance and ability to spend were taken into account when deciding allocations to departments. They noted that it was very important that provincial governments should carry out oversight. A Member queried the assumption that municipalities could generate own revenue, pointing out that some rural municipalities were populated with unemployed people who could not pay for services. Members thought it was important for the committees also to engage with recommendations of the Financial and Fiscal Commission.

Meeting report

Opening remarks
Co-Chairperson Mr E Sogoni (ANC) noted that there were fewer Members at this workshop because Monday was a constituency day. He noted that the workshop on the Medium Term Budget Policy Statement (MTBPS) would be important in helping Members and officials to understand the process. He noted the presence of a delegation from the Southern African Development Community (SADC), which was in the process of establishing an Association of Parliamentary Forums on budget, and wished to share experiences.

National NT briefings
Mr Kenneth Brown, Deputy Director General: Intergovernmental Policy, NT said he was glad that researchers were in attendance and asked them to engage with the delegation from NT (NT).

He noted that NT would be tabling the Adjusted Appropriation Bill, Division of Revenue Amendment Bills (DORB) and the Mid Term Budget Policy Statement (MTBPS). This workshop was intended to explain the terminology and make documents released from NT easier to understand, although he recognised that some could not be written in simple language because certain terminology could not be replaced.

South African Budget Process
Ms Kay Brown, Chief Director: Expenditure Planning, National Treasury, noted that the budget process was concerned with making choices about competing priorities. She said efficiency, fiscal stability and sustainability were important in channelling government money towards priority areas, so that viable long term solutions were found. She stressed that service delivery was vital.

Ms Brown said budgeting started with a political exercise, because political choices were made on priorities at the lekgotlas, or government meetings,  It started by political choices about the priorities at the Lekgotlas (government meetings), and ended with a political decision as to which projects would be funded. This process also involved executive government and Parliament.

The three spheres of government needed to cooperate. The vertical division of revenue during the MTPBS time talked to these different levels of government. She said South Africa used a three year rolling budget system for the MTBPS. She said that when using this system, NT stuck to the principles of sustainability, priorities, and efficiency.

Currently, Parliament could amend the budget proposals from National Treasury. There was an outcomes approach and the budget needed to be responsive to it. The budget process was undergoing reforms in order to align with the outcomes approach, and the changes in procedure and processes brought about by the Money Bills Amendment Procedure and Related Matters Act (the Money Bills Act).

Ms Brown explained that since the previous year, NT had grouped different entities across the three spheres of government according to functions. She said this would help NT focus on particular outcomes and outputs required. NT also looked at various institutions and how they cooperated to achieve government functions. It would look at an individual institution or department, including its provincial offices and all the relevant stakeholders, and then decide upon the expected outputs and how to improve matters.

Ms Brown outlined that the Medium Term Expenditure Framework (MTEF) spoke to the three year budgeting system. This process involved looking at inflation, once-off expenditures like the World Cup, and the fiscal framework, as informed by the macroeconomic forecast. All these would influence what was put down as the 2014/15 amount, as well as savings and reprioritisation. The budget process unfolded throughout the entire year and went through various types of analysis that would influence the final budget in February. The role players in the budget process included the Cabinet, Minister’s Committee on Budget, and Parliament. It aimed to involve all stakeholders at various stages of the budgeting process. For the budget cycle, there were two submissions received from departments. The first one was the Estimates of National Expenditure, which forecast an amount and said how it would be spent. The second submission included an estimate and proposals for additional amounts. As the budget process unfolded, and through the functional mechanism, there would be discussions with departments and entities.

The Medium Term Expenditure Committee considered the submissions, together with the analysis undertaken on them, and made submissions to the Minister’s Committee on the budget. This committee made recommendations to Cabinet. If it was approved, NT was then able to table the MTBPS, which had the details of the vertical division of revenue, but did not have the details of the allocations to national departments. At the same time there was an in-year process that allowed for mid-year adjustments to the budget. There was then a process in terms of the Medium Term Expenditure Framework where, in preparation for the February budget process, NT would finalise the national allocation level and issue allocation letters to departments, on the basis of which they would be able to prepare databases and documents in preparation for February.

Ms Brown said that extra inputs were accepted in the last two years, as a result of the Money Bills Act, and a significant step was the Budgetary Review and Recommendation Reports, which set out the issues raised by Parliament in respect of the performance of particular departments. These Reports were referred to the Minister of Finance and recommendations were considered for the February budget statement. She said the Minister of Finance was also expected to table a report that highlighted how the budget and the division of revenue talked to the concerns that had been raised by Parliament. If the Minister’s explanation did not address adequately the concerns on the report, the Money Bills Act empowered Parliament to amend the budget.

There would be a review of the new priorities and major proposals at the beginning of the financial year. These decisions led up to the July Cabinet Lekgotla, although at the same time, there would be ongoing work being done on the macroeconomic projections and first estimations of the fiscal situation, and from the time the information was presented, in about July, intensive work on the budget was undertaken. She said departments used the information on detailing costing around the new programmes and existing programmes they might need to modify, in order to respond to the fiscal framework. At some point in July they would make a budget submission and there would be various inter-governmental and technical forums where institutions engaged each other. In August, the Cabinet had to make the final decision around the framework and the division of revenue that would be tabled as the MTBPS. The Budget Review and Recommendation Reports were then submitted. When this was done, Parliament would adopt the fiscal framework, take a stance on the Division of Revenue and the Appropriation Bills, with or without amendment. The Cabinet would look at the proposals on details of national allocations. Departments could then finalise their inputs.

Further refinements were made in January and the national budget would thereafter be tabled. This would include a response to the Review and Recommendation Reports. Two weeks after this, provincial budgets were tabled. Departments would then table their strategic plans. Provincial legislatures, in according with the Money Bills Act, went through the same process, although they had more time.

Ms Brown took Members through the portion of the document dealing with adjusted estimates, and noted that these differed from the three-year cycle (see attached document for details).

Ms R Mashigo (ANC, Gauteng) voiced her concern that the Parliamentary Committee’s role in the budget processes was stated clearly in the Money Bills Act, and yet the NT document did not mention it. Section 12 of the Money Bills Act talked about rules and what should be taken into consideration; and section 16(a) referred specifically to the Standing Committee on Appropriations, which should mediate during the BRRR, but nowhere was the Committee mentioned in the document. She pointed out that MPs passed the laws, and the Constitution and Money Bills Act prescribed what MPs should do. She stressed that Members wanted to know about and be consulted when there were adjustments planned.

Ms Brown apologised if the impression had, mistakenly, been created that Parliament was not important in the budget process. She said the budget-process started in the preceding year, with Budgetary Review and Recommendation Reports. If NT did not have those inputs, then it would not know Parliament’s views on certain issues prior to going to the next budget speech. She said the budget-process was not a one-day event where views of MPs became important only on the day of tabling. NT would welcome an even stronger role for Parliament, as it was the only body that could hold institutions to account. She said NT did not have powers to instruct departments to do certain things. All the information coming from Parliamentary committees was considered when budget proposals were made.

Co-Chairperson Mr C de Beer (ANC, Northern Cape) suggested that other Chairpersons from other Committees should also be invited to the future workshops, as legislation stipulated that budget work was done in connection with the other Committees. He noted that the role of Parliament in the budgetary process went further than this workshop, as it bordered on a Constitutional process.

Mr De Beer sought clarity on the pattern of spending, noting that this tended not to be consistent, and that in the fourth quarter, many would show a sudden increase in spending. Whenever money was spent, there needed to be measurable outputs. This kind of behavior made Parliament wonder if there was planning and, if so, who monitored it.

Mr De Beer asked if the budget process of consultation was followed, and if not, asked why not. He commented that the work would be much easier if NT had followed what it had on paper as a consultation process. He asked if the MTBPS was working, and if it was not time to reconsider it.

Mr De Beer also sought clarity on unallocated funds, asking why they were needed. He asked if disaster relief and unallocated funds amounted to the same thing. He wanted to know at what point unallocated funds were made available for use.

Ms Brown replied that unallocated funds and contingency reserves were separate. She cited that in the last year, R800 million was put aside for the green economy but was unallocated. The reason that it was set aside was planned, because it was known to be an important priority and the Conference of Parties (COP17) was also imminent. There needed to be some spending to get a green economy going, and the money was set aside as a result of the planning exercise. However, the information was not yet sufficient for NT to persuade Parliament to fund certain departments in set amounts as yet, so NT had merely announced that a certain amount was set aside.  The making of an allocation to a particular department was contingent upon proper planning and costing, and those funds could only go via a Parliamentary process. Unallocated funds would remain with the fiscus if they were not spent. The contingency reserve was always set aside for disasters.

She said that National Treasury had been transparent in terms of where the money was spent, and for what purpose. Plans were important, but somehow institutions failed to act according to the plans. She said NT made an assumption that departments would spend the funding. She added that it was serious when they did not, for NT paid interest on the unspent funds. Greater cooperation between all the stakeholders in the budget process could help, considering the fiscal circumstance. She said NT shared the concerns expressed by Members that departments produced plans but did not meet them. The money that they failed to use could have been better spent somewhere else.

Mr M Matomela (ANC, Eastern Cape) said under-expenditure had been a challenge. He said the noticeable increase in spending towards the end of a financial year was tantamount to dumping funds.
He thought that procurement plans by departments needed to be presented quarterly. Procurement needed to happen in the fourth quarter, so that when the budget was tabled departments could start spending according to allocated percentages. He said justice was not done to the people if the situation was allowed to continue.

He noted that the budget for compensating public servants was increasing at a high rate, and when there was no service delivery on the ground, that made Members wonder what public servants were paid to do. He asked if NT had plans to curb these tendencies.

Ms Brown said that according to the new strategic plans, national departments were required to submit quarterly performance reports and Parliament could insist that those were made available. Accounting officers could be called in by Parliament any time. She corrected the assertion about the wage bill, saying that it was in fact below the inflation increase. It was the compensation of employees’ portion that had been increasing, and the cost of servicing the debt was another major cost driver.

Mr V Windvoel (ANC Mpumalanga) asked for clarity on the unforeseeable and unavoidable expenditure, which was quoted in one of the graphs as standing at R2.6 billion. He also questioned the expected personnel remuneration adjustment of R6.2 billion and asked why this appeared.

Ms Brown replied that provision for unavoidable expenditure was meant to ease the burden of expenses that departments could not anticipate, but were forced to meet. She said this expenditure could be contractual or be incurred as a result of a disaster, but it must be geared towards service delivery.

The Chairperson said although NT argued that Parliament was better placed to take compelling decisions, it was the only entity that was empowered by the Constitution and an Act. He said the Act and the Constitution stated that NT should play an active role in dealing with money and expenses. The Committee understood that NT did not want to be seen as a super-department but the Constitution seemed to imply that it was.

Mid-Term Budget Policy Statement & Determining the fiscal framework
Ms Joan Stott, Director: Fiscal Analysis, National Treasury, explained that fiscal policy was effective management of revenue expenditure and debt within the dynamic global and domestic economic environment. She said the development of a new financial year was developed from a baseline, which she described as an allocation in the last budget that was tabled. She said that NT would construct a new baseline total for the outer year (2014/15), by moving from what was tabled in February and the 2011-2014 MTEF. This was done in consultation with the Expenditure Planning and Public Finance and Fiscal Policy Unit at National Treasury. As a starting point, NT removed any of the once-off programmes that had come to an end. It then looked at the baseline and considered if there were areas that needed to be shifted. NT prioritised, and then grew the baseline by a rate that was representative of inflation and economic growth.

Ms Stott explained that a further analysis of the baseline was done to determine where savings could be made. This had been very important in the last two budget processes, given the constrained fiscal environment in which NT was operating. Government was spending more money and needed to investigate if it was getting value and the best service delivery. Therefore, once a baseline had been established, NT would check whether the level of expenditure was correct. NT would update the economic framework for the macroeconomic forecast. The forecasts were published twice a year, in October and February. However NT went through the process of updating the forecasts every quarter. She said this was in line with the release of the quarterly bulletin by the Reserve Bank. As new economic data became available, NT would examine it, and new variables were added into the framework for real Gross Domestic Product (GDP) growth, normal GDP, GDP inflation, the Consumer Price index and the Consumer Price Inflation Index. She noted that GDP inflation was the aggregate of all types of inflation in the economy. Consumer Price Inflation looked at the basket of goods that were mainly used by households. NT also looked at increases in prices faced by producers; and then the health inflation, in respect of medical goods. She said health inflation increased differently to the consumer goods.

By this stage, NT would have a good idea of what the economic performance had been, and could estimate what the tax revenue performance would be. She said NT needed to determine the outlook for the economy before it could look at the forecast revenues. Revenues performed in line with the economic performance. Last year, revenue underperformed NT estimates by R60 billion.

As part of the forecasting cycle for revenue, NT participated in the Revenue Analysis Working Committee. This Committee met one month before every budget statement. This Committee was made up of representatives from the Budget office, modeling and forecasting unit, tax policy, South African Revenue Services, the Reserve Bank and Statistics SA. It discussed performance for the revenue in the year, and discussed the trends in revenue, in light of the outlook of the economy over a three year period.

Ms Stott explained that prior to 2009, revenue had showed good performance, and NT was able to add a fair amount to the baselines. However, the environment was now more constrained. A focus was placed on what the departments already had. NT was focusing on getting the fiscus to a sustainable position where it was no longer funding recurrent expenditure like wages, and goods and services debt. She said the debt had grown substantially in the last two years. Decisions to the baseline were not increased unless a decision was made by the Cabinet. Once NT had determined the level of non-interest spending, it could look at what the budget balance – the difference between revenue and expenditure – was likely to be. This budget balance was the level of the consolidated government accounts and included national government, the social security and reconstruction and development funds. Government entities were included in the framework, except for local government.

The framework was then sent to the Assets and Liability Unit to determine changes that were required in financing. This Unit would give input on the interests that were to be paid on the new level of debt. Once NT had the full framework, it needed to ensure the budget was credible. She said departments were able to do more than just meet the rising prices. In terms of debt management, the Department needed to look at what forecasts were on interest rates. She said growth was important in managing debt stock over time. If there was a real low growth and rising interest rates the debt stock was likely to increase. She described the MTBPS as a policy that underlined the budget.

Division of Revenue Act and Revenue Amendment Bill
Ms Wendy Fanoe, Chief Director: Intergovernmental Policy and Planning, National Treasury, explained the Appropriation Bill and Division of Revenue Bill. She said the Appropriation Bill did not review the national government budget, and the Division of Revenue Bill (DORB) dealt with allocations at the provinces. She said once the fiscal framework was approved, the division of revenue and the appropriations would be approved as well.

She outlined how the allocations between the three spheres of government differed.  National government took the huge chunk of revenue sources like income tax, VAT, and customs duties. Provincial governments had their sources of revenues, but generated little and so they relied on the equitable share received from national government. Municipalities had their own revenue generation sources, of property rates and utility charges. She said municipalities generated more money than was required for the service they provided. Municipalities generated 75% of their revenue and needed much less from the fiscus, although she did concede that this generalisation tended to apply to the larger municipalities.

The Division of Revenue Bill was prescribed by Section 214 of the Constitution, and this required that funds were available and allocated equitably. She said the budget process was strengthened by the functional approach that NT was following. There was now a new process that if there was any change that impacted on the vertical share of provinces or municipalities, NT required a Division of Revenue Amendment Bill. She said this was generally a very short Bill; last year it contained only two clauses.

Ms Fanoe stated that government was doing sterling work in allocating the resources. She said it was important to go through the full cycle. Oversight by Parliament, Provincial Legislatures and municipal councils was an important part of the monitoring process. The in-year monitoring was necessary to ensure that the money was correctly spent. At national government level, it was the responsibility of the transferring officer to ensure that there was progress and that reports were submitted. If spending was not taking place, the officer had to follow-up with the concerned municipality, department or entity to ascertain the underlying reasons. She said it did not assist if the department transferred the money and at the end of the year it had to be returned to the fiscus. If there was not the correct level of spending taking place, the transferring officer could delay the transfer, or report to National Treasury.

Ms Fanoe said that it was very important, in relation to provinces, to look at the spending on personnel, and compare this with the budget of a previous year. She said it was important for Parliament to look into this closer. It was also vital that investigations should be done into expenditure on infrastructure.

Mr J Gelderblom (ANC) said that every year the same problems were raised about the criteria for the allocations of departments. He wanted to know to what extent NT took into account past performance and ability to spend when deciding the allocations to departments, and asked how strong the criteria were.

Ms Fanoe said NT sometimes took past performances into account when allocating. She said provinces were entitled to an equitable share, which was determined by a formula dividing the money between a number of provinces or municipalities. She said provinces could not be penalised because they did not perform to the required level. This mostly applied to the conditional grants, and these were a substantial reason for non-expenditure.

Co Chairperson Mr De Beer said it was important for provinces to do oversight work as well, especially when service providers made claims of work they had not finished. He cited an example of a bridge that was claimed for in the North West, noting that when the Committee visited there was no bridge and materials were lying on the river banks.

Ms Fanoe said she agreed with the Chairperson, and this was very serious. She said national transferring officers needed to ensure that their monitoring systems were in place.

Co-Chairperson Mr Sogoni said that other Committees needed to be invited to future workshops on the budgeting process. This would help the committees to understand the input that Parliament as a whole could make to the budget.

Mr Sogoni thought that National Treasury’s assumption that municipalities had the same power to generate revenue was incorrect, and pointed out that a large portion of the rural municipalities were populated by unemployed people who were not paying for services, and that needed to be reflected on the budget.

Ms Stott replied that NT took account of the BRRR and the Fiscal and Financial Commission (FFC) recommendations, and those were very important. She said that the NT’s Fiscal Analysis Unit dealt with the numbers.

Ms Fanoe agreed that many municipalities were fully reliant on transfers. She said NT systems were starting to respond to these challenges.

Mr Sogoni said Parliament should also engage with recommendations of the FFC, so as to understand the issues and form a position that may or may not agree.

The meeting was adjourned.


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