Budget Analysis for Effective Fiscal Oversight: Financial and Fiscal Commission workshop

Standing Committee on Appropriations

07 February 2012
Chairperson: Mr E Sogoni (ANC)
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Meeting Summary

The Financial and Fiscal Commission (FFC) addressed the Committee in a workshop that was intended to enhance Members’ understanding of the budget process, advise them on key economic terms and concepts and assist them in devising pertinent questions during budget briefings.

The FFC noted that budget processes for government were legislated. In essence, budgeting was about planning how money would be sourced, and how it would be spent, and combined with action plans. It was emphasised that in the private sector a good budget would lead to the making of a profit but in the public sector the measurement was not profit, but service delivery. The difference between inputs, outputs and outcomes was explained with illustrative examples. It was also noted that a budget comprised revenue and expenditure, and when expenditure exceeded revenue, there would be a budget deficit, whereas when revenue exceeded expenditure, there would be a surplus. South Africa showed a large budget deficit in 1994, but the situation had improved until South Africa showed a surplus by the tenth year of democracy. Deficit would be experienced in recession years, but it was not sustainable for any country to run deficits continuously. It was explained also that prior to 1994, government would spend when it was running a surplus and cut spending when it was in deficit, but the democratic government had adopted the more modern approach of running counter-cyclical policies and increase spending during deficit years to boost the economy. The difference between deficit and debt was also explained, with debt defined as the accumulated deficits for a year. South Africa borrowed most of its debt from South African institutions, in rands, and ran a relatively small foreign debt of about 10%, which gave it a little more flexibility, although less room for hedging of interest rates against the exchange rate.

The FFC stressed that when governments presented their expenditure reports, they would often claim to have achieved savings, when in fact they had under-spent and therefore not delivered the services for which the budgets were allocated. Members were cautioned that they should ask searching questions whenever savings were claimed, and look rather to whether the planned outputs and targets were achieved. In other instances, they would fail to pay their suppliers, and in fact have accrued debt rather than savings.

The concepts of capital and operating budget were explained and their inter-dependence was illustrated. Current and recurrent budget expenditure was also illustrated, noting that recurrent expenditure had to be carefully monitored as it reduced flexibility. Contingency reserves were outlined, stressing that these were not intended for things that government simply failed to include the budget, but for unforeseen disasters. The current, and ideal, percentage that should be budgeted for infrastructure and maintenance was questioned, and FFC suggested that more attention must be paid to ensuring ongoing maintenance, particularly in view of the negative experiences with Eskom and water services. The terms of real and nominal budget were also explained. It was stressed that departments tended to delay their planning and would receive allocations although they were actually unable to spend, and sometimes they had little idea of how they could achieve the targets. A Member debated whether this resulted from incorrect appointment of unskilled people, but another Member urged that issues not be politicised, and pointed out that well-qualified people could simply fail to carry out responsibilities properly, and both plan and implement properly. The FFC also explained what the audit process entailed, and the various types of audit opinion. Members gave their opinion that audit committees were not strong enough and debated whether they should ideally be internal, external or shared, whilst the FFC stressed that the audit committee should be strong and Members must ensure that it was not prevented from fulfilling its function. Members also felt that the sanctions were not always stringent enough, and the FFC stressed that the legislation contained sufficient sanctions, but these were not always applied, which was a performance management issue. Members also noted their concerns with reports that municipalities had allegedly been lending money to banks, instead of spending on services, which was contrary to the legislation.

The difference between the audit and the appropriation was outlined, as well as the purpose of the Medium Term Expenditure Framework and it was noted that South Africa had not yet needed to make a downward adjustment on medium term forecasts. The link between economic growth and budget was outlined, and it was explained that a country’s investment was measured in money and assets. The impact of imports and exports was also explained, stressing that imports would be subtracted from gross domestic product, which then affected the balance of payments deficit or surplus. The current account of a country was the price difference between exports and imports, but a country could import only if it had reserves in its capital account. The current industrial strategy was encouraging local production of goods that were traditionally imported, as well as local or regional procurement. The effect of foreign ownership of a country’s assets was also explained.

The FFC was at pains to set out exactly what the fiscal framework comprised, and noted that even extra-budgetary items, such as donations, must be recorded and monitored. Contingency reserves were also included. This fiscal framework covered all three government spheres and public entities, and the way in which the revenue was divided was explained. The FFC noted that although policy was set at national level, implementation happened at local level. Inter-governmental relations determined who set and funded policies, and this was problematic in South Africa, where although many service delivery functions were shared across all three spheres, provinces and municipalities had limited powers to raise revenue. When delivery and budget allocation were not equitable, this would result in a growing gap between standards of living and services in provinces and municipalities. Only the biggest metros could generate most of their budget themselves.

FFC noted, in answer to questions about Risk Rating Agencies, that they exerted a substantial influence, although their methodology was neither standardised by legislation nor consistent, and therefore unreliable, and were not liable for their mistakes. Members also asked why Greece was showing so serious a decline in its financial position, despite operating on the euro. FFC believed that the personality of a Minister of Finance played a strong role in the perceptions about a country. The FFC also suggested that Parliament’s role and involvement in budgetary matters needed to be debated.

Meeting report

Chairperson’s opening remarks
The Chairperson noted that the Financial and Fiscal Commission (FFC) had been asked to brief the Committee. The FFC staff were expert economists and their input had always helped the Committee when interrogating departments. He also welcomed colleagues from the Portfolio Committee on Finance of the National Assembly, and others from the National Council of Provinces, and the Portfolio Committee on Finance. This workshop was intended to enhance Members’ understanding of the budget process prior to the budget speech. There would be follow-up sessions also with the FFC.

Mr B Mashile (ANC) noted that the length of this workshop indicated that it was a training session, and suggested that a certificate of attendance should be provided to those present, and their input should be acknowledged.

Ms R Mashigo (ANC) responded that certificates of attendance were not issued in other of the numerous training workshops attended by Members.

Financial and Fiscal Commission (FFC) presentation
Mr Bongani Khumalo, Chairperson, Financial and Fiscal Commission, said that this session was intended to familiarise the Committee with the budget process, and enable Members to have a better understanding and ask more pertinent questions when briefed by various entities, such as the budget office. This workshop should enable Members to explain and apply key fiscal and budget analysis concepts used in budget related legislation and documentation.

He noted that people tended to talk very loosely about the ‘fiscal framework’. Members needed to understand the fiscal framework in totality, as well as the division of revenue, and how it impacted on the three spheres of government. The tendency was to look at the division of revenue as just an allocation issue, but it was not this alone, but dealt with how it was allocated across the spheres and how that impacted on the identified key priority areas of government. He would also discuss the application of fiscal and budget analysis concepts to the Budgetary Review and Recommendations Reports (BRRR), which should be of high quality to determine how Parliament shared the budget.

Ms Tanya Ajam, Commissioner, FFC, explained that the difference between an ordinary budget and the Parliamentary budget was that Parliament was required by law to allocate money, which was referred to as “appropriations”. The legislation on appropriations prescribed how public funds must be spent, and Parliament had to oversee the spending.

A budget was a plan for the revenue (source of money) and expenditure (how it was spent), coupled with an action plan to control these. In the private sector, a budget would be measured on profit, and a good budget led to making a profit whilst a poor one led to losses. In the public sector, service delivery was used as the measurement. For this reason, Members had to focus on the results of the budget by assessing measurable outcomes, and whether service delivery happened. The oversight role was even more important than the budget.

Ms Ajam outlined that a budget always had revenue and expenditure. If expenditure exceeded revenue, this was referred to as a budget deficit. If revenue exceeded expenditure, there was a budget surplus. A surplus was important for government because it ensured there would be available funds to undertake projects. The government that took over in 1994 inherited a large deficit, and had again endured deficit during the recession years, but the outlook was not entirely negative. It would be unwise for government to run on deficit for a number of years.

Ms Ajam also said it was important to clarify the difference between a saving and under-spending. The tendency of many government departments was to claim to have achieved savings, whilst in fact they had not been spending because they were not delivering services. If a department did manage to achieve its outcomes and output targets, yet still had money left in its reserves, it had achieved savings. If it had not spent because it was not delivering services, that would be under-spending. It was important for MPs always to enquire whether departments had achieved their targets, when they claimed to have savings.

Another tendency was for departments and provinces not to pay suppliers, but instead to hold on to the money, and these should be referred to as accruals, and must again to be distinguished from a genuine saving.

Mr Khumalo amplified that once money was allocated to a department or province, it was a cost that related to a service delivery obligation. It was common for departments to lobby for resources, although they were not actually ready to implement the programmes, and in this case, they would fail to spend the money that was allocated. When the global financial crisis started, many departments were holding on to unspent money, which was reported as savings. This led to a disjuncture between planned spending and the delivery outputs. This too illustrated the need for MPs to ask targeted and hard questions when claims of savings were made.

Ms Ajam said South Africa had sufficient money, but it was not well enough translated into service delivery. If there was a genuine shortage of money, then oversight would not make a difference to achievements. However, oversight would make a difference if there were management efficiency issues. She said over-expenditure on tangible deliverables was forgivable, but under-expenditure was “a crying shame”.

Mr Mashile agreed with the need to be consistent on issues of claimed savings or under-spending. Government was not the same as the private sector, and it dealt with competing needs. Everyone needed to have a clear understanding of the real costs of under-spending, which would impact negatively not only on projects that did not proceed, but also on borrowing, for National Treasury may go out and borrow, at a large cost, for something that departments claimed to need, yet were not spending. The implications of under spending were deeper than they at first seemed.

Ms Ajam then explained the difference between deficit and debt. She said deficits were simply gaps between revenue and expenditure, calculated over a financial year. If the revenue was less than the expenditure, causing a deficit, government could go borrow money, and that became debt. Debt could simply be described as the cumulative deficits for all the previous years. When a government ran a surplus, then it would redeem a debt. She said there was a relationship between the deficit and the debt. Sometimes it was relatively cheap to borrow. A country’s credit rating was a determinant, because those countries that were considered more credit-risky were charged higher interest rates. South Africa was lucky in that most of its borrowings were from South African institutions, and only 10% was borrowed from foreign markets. The foreign markets required repayment in US dollars, and, depending on the rand/dollar exchange rate, this was likely to be more than local rates. Countries such as Zambia, whose total debt came from foreign sources, had little control on their borrowing.

The Chairperson asked for an explanation on the rating agencies on borrowing and the effect these had on borrowing.

Ms Ajam replied that the cost of borrowing was related to the perception of the risks in a certain country. Risks could include political, technological, or environmental risks and lenders would charge interest and a premium based on their risk assessment. Some institutions who called themselves Risk Rating Agencies visited countries to determine if the risk was increasing or decreasing, and would assign a rating, based on their findings. It was difficult to determine the reliability of the agencies, particularly where they underplayed the risks posed by the developed countries. This had contributed to the economic crisis that the world was in today. European countries and the USA were faced with more serious fiscal issues than the Risk Rating Agencies (RRAs) put out. If South Africa was in a similar position to some European countries, it was unlikely to be able to borrow. More countries were starting to call for the regulation of the RRAs, as they did not demonstrate objectivity, were operating without regulation and without standardised or legislated methodologies, and were not held liable for their mistakes. At the moment, the larger institutions, including the banks, were conferring to address these challenges, which had led to the downfall of many countries. If the RRAs perceptions had been negative, this tended to be relied upon, rather than an independent examination of whether the country in question was in fact managing its economy well.

Mr Mashile said the RRAs were dangerous organisations who had an ability to damage borrowing institutions’ reputations. This discussion had similar points to discussions on self-regulation of the media. He agreed that when RRAs had caused damage in the past, there was no recourse. Any move to regulating such agencies would assist.

Mr Mashile asked if the personality of a Minister of Finance played any role in the perceptions held about a country.

Ms Ajam replied that the Minister of Finance had to be a “showperson”, in the sense that ideally it should be a charismatic person who was not afraid to express an opinion, and who could engage with the market to assure it that government was in control. The prime job of any Minister of Finance had to do with managing perceptions.

Ms Ajam then moved on to deal with the categories of operating and capital budget. Capital budget related to the long-term investments, like infrastructural assets. The operating budget was the cost of running the country. The two were linked, because if government had capital now it would have to maintain that in the future. She cited an example of a school, where the capital budget would have paid for the buildings, but government needed to have an operating budget to ensure that the school was functional and services were delivered. She also explained the related terms of current and recurrent budgets. Current expenditure would cover items such as wages for civil servants, and consumables in hospitals. These were recurrent complementary inputs that were needed in order to deliver services. Recurrent expenditure needed to be watched closely as it reduced flexibility on government’s ability to make decision for the year ahead.

Mr Khumalo said that in the context of the capital budget, recurrent expenditure had an impact and people would have to look carefully at recurrent expenditure when deciding on projects. He said it was important to keep track of the implications of today’s decisions on future operating budgets.

Ms Ajam said it was important that expenditure must be carried out on the capital budget. If this did not happen, it could lead to a skewed allocation of the operating budget in favour of the urban areas.

Mr K Mubu (DA) asked how government took care of contingencies.

Ms Ajam replied that there was a contingency reserve, which was an unallocated amount, intended for things that could not be foreseen exactly at the time the budget was drawn.

Mr Mashile wanted to know if it was sensible for departments to budget 2% of infrastructural projects for maintenance purposes, as had been done in the past, or whether these figures had changed.

Ms Ajam said FFC research indicated that this was no longer happening. Government still built schools, but these schools were not being maintained. There needed to be oversight to ensure that departments did not “save” on maintenance money, because if the maintenance was not done regularly, the cost of repair, particularly for things like road, would end up being several times the cost of the maintenance. Water and electricity infrastructure had not been properly maintained for over a decade, and that had led to exorbitant losses. There were critical issues around how maintenance and operating expenditure were funded. She noted that many departments did virements, or shifting of funds, between maintenance and salaries, claiming to have shown a saving, when in fact they did not spend as they should have on maintenance. The impact of the degradation would not be immediately apparent, but always manifested itself over time. It was important, when savings were claimed, to check that this was not at the expense of essential services like maintenance. When no maintenance was done, this equated to under-expenditure. Those departments that had numerous assets, such as Departments of Public Works, Education and Health, needed to be transparent on maintenance in their budgets. Maintenance should be reflected on its own, instead of being lumped under goods and services, to determine exactly what percentage was being allocated to maintenance.

The Chairperson said there was a time when National Treasury was strict about maintenance. This was an important point that needed to be dealt with when the Committee discussed appropriations. Maintenance needed to be reflected specifically in the breakdown of national spending.

Mr Khumalo said that maintenance was a specification required in this year’s budget. Departments would receive allocations, based on what they had applied for, and in most instances there was a budgeted amount for maintenance.

The Chairperson said when departments applied for budgets they knew they would be shifting funds. The budgets were approved by June, but already when the first quarterly reports came in, a shifting of funds could be seen, and this impacted on the credibility of the budget.

Mr Khumalo said that Parliament’s role and involvement in budgetary matters was raised in the BRRR. It would be important to look at the implications. If Parliament was involved in these decisions the rules needed to be clearly defined. It was possible that National Treasury had too much discretion, and this might need to be curtailed so that Parliament could exercise oversight over these processes. The concerns on the maintenance budget were real and genuine, and Members needed to start thinking about what the rules of engagement should be.

Ms Ajam went on to explain the reference to a budget by the terms real and nominal. The budget in nominal terms was normally the budget in rands. The budget in real terms took into account issues like inflation. She described inflation as the general increase in prices that resulted in less purchasing power. Over a period of years, a lump sum might have a different purchasing value, depending on the difference between the percentage increase of a budget in nominal terms and the inflation rate.

Ms Ajam then explained the difference between input, output and outcome. She said the input related to all the resources needed to deliver a service. She cited an example of a hospital, where an input would include nurses, beds, blood, medicine and other items. The output would be the actual services rendered by a particular department. In the hospital scenario, the number of patients treated would be counted as an output. Outputs were tangible objectives, since they could be measured. She described the outcome as the final impact. In the case of a hospital, an outcome would be the increased life expectancy and reduced death rate.

Ms Ajam said the output was largely in the hands of the department concerned. Members of this Committee needed to ensure that the budget allocated was put properly into the input, and that there was monitoring of the output and outcomes. The question was really what had been done and she stressed that the job was not finished until it had made a difference to the public. Monitoring and evaluation must look beyond the mere output. In some departments, it was difficult to measure outputs, including the Department of Defence, but it must still be measured.

Mr Mashile said even at departments where it should be relatively easy to measure the output, this was sometimes difficult to do because of the levels of directorates where input was made.

Ms Ajam said departments knew that it took five months for budgets to be approved. Their planning for the next year should already be happening in the second half of the current year. Many departments started new projects long before budgets were approved, and many of the difficulties could be foreseen by proper and realistic planning. It was important also to look at trends when doing the planning. Many departments were focused on the targets, but had little idea of how to achieve them. Members should ask questions that encouraged good planning, and were not seen as obstructing the targets. It was far better to have realistic targets on which delivery could be made, than unrealistic ones that had to be revised.

Mr Mashile wanted to know if the mismatch between targets and deliverables was not largely the result of lack of skills in those doing the planning. He cited the example of a hospital in Kimberley, where government was struggling to finish the project, and where there were no guarantees that electricity and water would be provided on a sustainable basis. The strategic plans tended to be more bureaucratic and consultant-driven, and this confused the people who were supposed to implement the plans.

Mr Mubu questioned if this was not also further exacerbated by cadre deployment.

Mr Mashile interrupted to point out that Ms Ajam was surely not in a position to answer this question. The problem might not necessarily relate to cadre deployment, but could also be that people who were, on paper, well-qualified failed to carry out their responsibilities. The reference to cadre deployment amounted to politicisation of the issues, which was a problem. The question was simply whether in a municipality, no matter who ran it, the right people were appointed to the planning departments, and if they were able to implement the plans.

Ms Ajam said it was important that qualified and accountable people were appointed to positions.

Ms Ajam then went on to note that an audited budget allocation was one that had been checked, through audit, by the Auditor-General. The Auditor-General’s (AG) opinion was important because it gave assurances to Parliament about whether a department’s financial statements reflected the true position of its finances. The AG’s opinion could be clean (unqualified), qualified, adverse, or a disclaimer. A clean audit meant that nothing untoward was found in the financial statement. A qualified audit opinion meant that although the financial statements could generally be trusted, there were weakness. An adverse opinion referred to structural problems. A disclaimer was the worst type of opinion, and could indicate that the AG did not even get the required documents to enable him even to form an opinion.

Mr M Swart (DA) said that one of the major weaknesses was that virtually every department and municipality had toothless internal audit committees. If these had more powers, many of the problems in government would be solved.

Mr Mashile said the problem lay with the fact that internal auditors had to function as part of the municipality’s staff complement. When the position of the internal auditor was located outside, it would be possible to strengthen it; when it was an internal position, the internal auditors were still reporting to the municipal manager.

Ms Ajam clarified that at municipalities there was an internal auditor who assisted the accounting officer, who was an employee of the organisation. This service could be outsourced. However, there was an audit committee outside the municipality, which was chaired by an independent person. This audit committee had access to all of the financial statements and reported to council. Its responsibility was to provide assurance to the authority that whatever was reflected on the statements was actually happening. It was possible to give sufficient powers to such a body. She said it was important that members of such a committee be people who were not afraid to ask hard questions.

Mr Swart said such an audit committee needed to report outside of council to avoid victimisation.

Mr Khumalo noted that the audit committee needed to respond to the AG’s report. It therefore should be supplied with whatever documents it required. Members of an audit committee should take their responsibility seriously. In most cases, because of the appointment processes, there would be past relationships between councillors and municipal managers. He said it was “absurd” that mayors and municipal managers often disregarded audit reports. It was common for audit committees not to be given the documents they required, or, in the worst cases, council might refuse to act on its recommendations. Members of this Committee needed to look into whether the sanctions that were already provided for in the legislation, for precisely these instances, was being enforced. There was a legislative framework to deal with transgressions, and that ought to be properly enforced.

Mr Mashile voiced concerns about internal auditors providing services to more than one municipality. He asked if sharing of the internal audit services assisted the monitoring process. He felt that internal auditors needed to be part of a municipality or an institution, and should be available to test controls and measures on a daily basis.

Ms Ajam replied that it really depended on how this was managed. An institution could have an internal person, a shared person, or even outsource the service. It was vital to draw up an audit plan at the beginning of the year. Of prime importance was the strength of the audit committee, and whether it could ensure that the internal auditing ran smoothly, irrespective of whether the function was located internally or externally or was shared. There should not be lapses in functioning of the audit committee and the internal audit, and there had to be constant liaison. If councils or department had not followed up on recommendations, that needed to be reflected in the audit committee report. If this was not done, the audit committee members were liable for financial irregularities.

Mr Mashile said the function of the internal audit should be arranged in such a way that any irregularities that might lead to disclaimers should be detected much earlier, and the indications communicated to the municipalities.

Mr Mubu said the levels of sanctions imposed on councillors and departments were not stringent enough, and questioned how this could be done. He felt that those responsible for continuous qualifications should not keep their jobs.

Ms Ajam reiterated that there were already sanctions in the legislation, but the monitoring needed to be a performance management process, as opposed to being a legislative process. She failed to understand how an accounting officer of an organisation that had received a qualified audit for the past five years could still qualify for a bonus. This, however, was something that could not be legislated, but should be dealt with through performance management.

Ms Ajam then moved on to note the difference between audited figures, which reflected what had been spent, and the appropriation, which was the budget provided for in law. The medium term expenditure for the next two financial years was an indication, but could still change. South Africa had been fortunate in that it had never had to make a downward adjustment on its medium-term forecasts. This allocation gave the country more certainty.

The economy obviously impacted on the budget. If the economy grew slower than was anticipated, the revenue would be low. When the economy changed, the budget also had to be revised. She said the budget influenced the consumption of goods at individual homes. She explained that Gross Domestic Product (GDP) was the value, in rands, of all the goods and services produced in a country in a year. Growth was recorded in the economy if more goods were produced. GDP was an indicator  of economic growth.

Ms Ajam explained that a country’s investment related not necessarily to money, but physical assets like construction or manufacturing plants. This was sometimes referred to as growth capital formation. It meant that the country had added to the physical capital stock.

Ms Ajam then outlined that exports were goods sent out to other countries, whilst imports would be goods received from other countries for consumption in the home country. These trade processes were dependent on the exchange rate, which was the cost of a US dollar, in rands. Imports were subtracted from the GDP. If imports were more than the exports, South Africa would be in debt to the rest of the world, and would have a balance of payments deficit. If exports exceeded the imports, then the rest of the world owed South Africa. When a country exported its own goods, it would get foreign exchange from other countries. If it imported goods, this position was reversed.

Mr Mashile asked about the position where municipalities might lend money to the banks, although that money was supposed to be spent on services, in order to gain interest on that money. If this happened, the municipality had in fact suspended service delivery. He felt that its funding should rather be made available to other municipalities who were delivering services.

Ms Ajam replied that the mandate of municipalities was to deliver services, and not to try to make a profit. If a municipality deliberately failed to deliver services, using the money instead to make a profit, this was clearly incorrect.

The Chairperson said the Municipal Finance Management Act was clear on such behaviour, and prohibited this kind of action. He noted that the role of Parliament in all of these instances should also be clear, so that action could be taken, instead of complaints noted.

Ms Ajam continued with her presentation. She noted that government received taxes from households, the financial sector and business. These taxes would be spent in government expenditure. The reason that the USA had managed to sustain itself, despite the fact that it had continually operated in deficit, was that China owned 10% of US bonds. China was exporting huge quantities of goods, and it ran massive surpluses. She said even Europe had to turn to China to borrow. Failure by the developed countries to spend impacted on the developing nations. When government expenditure was more than revenue, government would be forced to draw on domestic savings, and would effectively be selling government bonds.

Ms Ajam said the balance of payments simply spoke to the amount of money that left or came into a country. These processes were inter-related.

Continuing with her explanation of the terminology, she noted that the current account was the price difference between goods that a country imported and those that it exported. This could also extend to services that a country rendered and received, interest payments received abroad and those it paid, dividends received and paid, transfers received and paid, and other matters. The current account would reflect how much a country had received in income once it had deducted what it owed to other countries. A current account surplus implied that a country did have money, whilst a deficit meant it had to draw down.

Ms Ajam said again that countries whose debt was mainly external or foreign, like Mozambique or Zambia, had little control over their affairs. South Africa’s foreign debt was relatively low.

Mr Mashile wanted to know the impact on the current account if a country imported more goods than it exported.

Ms Ajam said there was a norm in regulating debt. The current account needed to be offset by what was in the capital account. The capital account was largely the country’s reserves. A country could import only if it had reserves. South Africa tended to import a lot of capital equipment, such as machinery, in order to be able to manufacture and then export. One of the objectives of the current industrial strategy was to ensure that machinery was produced in the country. Another policy of localisation, which meant buying from within, or importing from local neighbours to reduce the imports from overseas was a good move.

She reiterated that the financing in the capital account would determine what could be done in the current account. The current account could simply be the trade income or imports and exports. The  capital account could include a change in foreign ownership over South African assets, less a change in South African ownership over foreign assets. The capital account included international companies establishing plants or business in a country. This was seen as positive, because it created jobs for local people, and resulted in investment in infrastructure.

Ms Ajam said most people confused fiscal framework with revenue. She said the Money Bills Amendment Procedures and Related Matters Act (MBPRMA) provided a specific definition. The fiscal framework was a framework for a specific year, which gave effect to a national executive macro-economic policy. It would include a number of issues, and would specify all revenue that was expected to be raised during that financial year. Something that was “extra-budgetary” meant something that was not included in the budget, which would include money that was actually received although it had not been appropriated through the budget, such as donor funding. The reason that this was also included in the legislation was so that Parliament had oversight over all money that was made available. Every cent that government received must be shown in the fiscal framework, whether or not it was in the budget. No “slush funds” should exist that were neither in the budget nor the fiscal framework.

The fiscal framework included a contingency reserve for an appropriate response to emergencies. Contingency reserves was not meant for matters where government simply forgot to budget, but matters that could not be quantified, such as disaster relief. The Public Finance Management Act (PMFA) had sections on how to deal with emergency funding.

Ms Ajam then explained that the consolidated government fiscal framework covered all three government spheres and public entities. She said the revenue that was forecasted in October, in the Medium Term Budget Policy Statement, for 2012/13, stood at R890 billion, rising to about R1.1 trillion, or 27.2 GDP in 2014/15. Expenditure was forecast as R1.3 trillion.

She then explained that when a country was operating on deficit, it was wise to stimulate the economy. Because South Africa was operating on a deficit, the fiscal policy stance was expansionary. If South Africa had been operating on a surplus, the fiscal policy stance would be contractionary. It was important for Members to consider whether it was indeed appropriate at this stage to run an expansionary fiscal policy, but reminded them that when the economy was bad, it needed to be stimulated. When the economy was low, more people needed grants. When the economy, and jobs, improved, this spending on grants would decrease.

She noted that fiscal policy was counter-cyclical, and explained that governments looked at whether the business cycle was in recession or boom, and then the fiscal policy would be run in the opposite direction. When there was a recession government would stimulate the economy by spending, but when the economy was booming, government ran surpluses and encouraged savings. Prior to 1994 South Africa had not been following a counter-cyclical trend because then, when the economy boomed, government increased its spending but when the economy contracted government had cut on spending. It was only after 1994 that South Africa had moved to the modern counter-cyclical system. Government was doing the right thing in following this path. However, it was not sustainable for any country to run too long on a deficit.

Mr Mashile wanted to know the determinants that would inform the decision whether to run a contractionary or expansionary economy.

Ms Ajam replied that forecasts were very important. Economists looked at leading indicators when determining what would happen to the economy, and she likened leading indicators to an early warning system. Policy was really about exercising good judgment, because nobody knew what exactly what the future would hold. The Minister of Finance had to be decisive in implementing these processes. The Reserve Bank published the indicators quarterly, and these should be monitored. The Bureau of Economic Research in Stellenbosch also conducted surveys with business to gauge business sentiments in the economy.

Mr Mubu wanted to know how it had happened that the economy of Greece was diving, whilst other countries using the same currency were floating.

Ms Ajam replied that this was a controversial issue. She explained that a monetary union described the situation where several countries shared the same currency, whilst a fiscal union occurred when a number of countries coordinated their budgets. This had not happened in Europe. Even though all the budgets were denominated in euros, the countries remained individually responsible for how they had budgeted for themselves. This was a weakness; ideally a fiscal union ought to have been arranged at almost the same time the monetary unit was decided upon.

Ms Ajam went on to note that government had no control over state debt cost in the short term. She said interest expenditure was non-discretionary and could not be effected in the current year. Government would only have control over non-interest expenditure. Government could hedge interest against currency fluctuation, but because the South African debt was largely a rand debt (from local borrowing) there was not so much room for hedging.

Ms Ajam reiterated that the fiscal framework could simply be described as the size of the whole cake, judged by how large were the expenditure and the total deficit. Once a government knew those figures, it would then start allocating, or dividing, the revenue.

Ms Ajam noted that although policy was set at national government, implementation happened at the local level. It was important that Members look at how much money went to national, provincial and local government. There could never be enough money for everybody, and the needs would always be greater than the available resources. When looking at inter-governmental relations, it was important to look at who set and funded the policy. A country might have the best policy in the world, on paper, but if this was not funded, then it would no doubt miss those policy objectives. This was what made service delivery so difficult in South Africa. In South Africa, provinces would often claim that a policy was badly designed or was not funded properly, when they had not implemented it. Funding was a difficult issue in a highly-decentralised system of governance.

It was important to recognise how intergovernmental relations were structured, because that could either create incentives or disincentives for service delivery. Intergovernmental relations could, or could not be, efficient and equitable. When delivery and budget allocation were not equitable, this would result in a growing gap between standards of living and services in provinces and municipalities. Issues like transparency, participation and diversity also played a role in how finances were structured.

Ms Ajam said that although the Division of Revenue Act (DORA) looked to be very technical, it actually impacted directly on the quality of life and service delivery. Provinces shared a lot of responsibilities with the national government. The 278 municipalities also shared responsibilities with national government, especially in areas like public transport, health, air pollution, and electricity. If a  municipality failed to fulfil its executive responsibility, a provincial government could intervene under directives in terms of Section 139. If the province did not intervene, then the national government could intervene under Section 139 (5).

Ms Ajam said most of the tax money was collected by South African Revenue Service (SARS) at national level, but most of the implementation was carried out at the lower spheres. This was problematic. There was a gap between the responsibility of provinces to spend, and the revenue that provinces could raise. This was sometimes referred to as the vertical fiscal imbalance. Some mechanism was needed to capacitate provinces and municipalities to collect revenue. SARS collected the “lucrative and buoyant” taxes like Value Added Tax (VAT), Personal Income Tax and Company Income Tax. Provinces, on the other hand, were limited to collecting taxes along the line of car licences, gambling proceeds, or hospital fees. Municipalities were limited to collecting property rates, electricity and water. Municipalities, on average, collected about 75% of the budget that they spent. This figure, however, varied across municipalities and sustainable collection was only possible at metros like the City of Cape Town, eThekwini, Johannesburg and Tshwane, who were able to generate about 95% of their budgets.

Mr Mashile questioned whether this figure was a true reflection of what was happening. He noted that many municipalities operated wholly on conditional grants.

Mr Khumalo replied that the 75% was an aggregated figure. He reasoned that the best way to understand revenue generation of municipalities was to treat them individually. The power of metros was huge and they could easily skew figures in their favour, but even the metros were not comparable with each other, as, for instance, Johannesburg and Buffalo City dealt with very different issues. If the metros were to be taken out of the equation, the revenue percentage figure collected by municipalities could be much lower.

Ms Ajam explained that the division of revenue took into account the revenue likely to be received from SARS, together with the amount it intended to borrow in the year, to get the total figure of what would be available. Government would then subtract interest expenditure and debt service expenditure, which were contractual obligations. What remained would then be divided between the three spheres of government. This, in economic terms, was the vertical division, and there was no formula for this.  Simultaneously, a horizontal division would be splitting revenue among provinces and municipalities using a formula.

She concluded that role players in the budgeting process would include the meetings of local government, Ministers and MECs, National Treasury, provincial Treasuries, Department of Cooperative Governance, provincial and local government departments, the national Parliament (NA and NCOP), provincial legislatures, SARS, the South African Local Government Association, the Budget Council (Minister of Finance and provincial counterparts), the Budget Forum (organised local government) and the Financial and Fiscal Commission
The workshop was closed.


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