ATC111123: Report on 2011 Medium Term Budget Policy Statement

NCOP Appropriations

Report of the Select Committee on Appropriations on the 2011 Medium Term Budget Policy Statement, dated 23 November 2011

 

The Select Committee on Appropriations, having considered the 2011 Medium Term Budget Policy Statement and having heard comments from stakeholders, reports as follows:

 

1. Introduction

 

The Minister of Finance (the Minister) tabled the Medium Term Budget Policy Statement (MTBPS) on 25 October 2011, outlining the budget priorities of government for the medium term estimates. The MTBPS was tabled together with the Division of Revenue Amendment Bill [B17 – 2011] and theAdjustments Appropriation Bill [B18 – 2011]. In terms of the Money Bills Amendment Procedure and Related Matters Act No 9 of 2009 (the Act), Committees on Appropriations are required to consider and report on the sections of the MTBPS dealing with spending matters. Among its responsibilities, as per Section 6(8) of the Act, the Select Committee on Appropriations is required to consider and report on the following issues:

 

·         The spending priorities of national government for the next three years;

·         The proposed division of revenue between the different spheres of government and between arms of government within a sphere for the next three years; and

·         The proposed substantial adjustments to conditional grants to provinces and local government, if any.

 

2. Medium Term Spending Priorities

 

Government prioritises its resources in the following areas:

 

• Job creation initiatives and realigning support to business to enhance employment opportunities;
• Enhancing the quality of education and skills development;
• Improving the provision of quality health care;
• Driving a more comprehensive rural development strategy; and
• Intensifying the fight against crime and corruption.

 

In order for government to afford these priorities, the rate of growth in public spending must be moderated. Difficult decisions include the reprioritisation and realignment of current budget baselines to maximise the achievement of government’s targets.

 

3. Hearings on the 2011 MTBPS

 

The Standing and Select Committees on Appropriations jointly advertised for interested parties to make oral and/or written submissions on the 2011 MTBPS. The joint hearing took place in Cape Town on 9 November 2011. Submissions were received from the following groups:

 

·         The Ceasefire Campaign – oral submission

·         The South African Local Government Association (SALGA) – oral submission

·         The Financial and Fiscal Commission (FFC) – oral submission

·         The People’s Budget Coalition – written submission

 

3.1 The Ceasefire Campaign

 

The Ceasefire Campaign argued that the people of South Africa’s experience of insecurity does not relate to military security, but to “human security” - that is security in terms of jobs, housing, food, education, healthcare, adequate policing and, power and water services. It believes that the proposed substantial increase in South Africa’s military spending is not what one would associate with a country that has no enemies and no prospect of any conventional military threat; and not what one would expect from a country with the sort of human security threats that South Africa has.

 

They proposed the following during their presentation:

 

·         Military security should be replaced with demilitarised defence methods and improvements in human security.

·         The South African National Defence Force (SANDF) should be mothballed.

·         By the 2015/16 financial year, military spending should be reduced to 0.5 per cent of gross domestic product (GDP).

·         Certain tasks that are currently undertaken by the SANDF should be demilitarised, partly by redefinition of the purpose and scope of those tasks and partly by transfer to other departments.

·         The net savings should be used to provide jobs in the delivery of human security.

 

The “mothballing” of the SANDF would entail the following:

 

·         The maintenance of weapons and equipment in working order.

·         Ensuring the security of weapons and equipment.

·         The maintenance of systems for the re-establishment of a military defence force.

·         The reduction of the staff complement to the level required for maintenance and security.

 

In light of the above, Ceasefire Campaign proposed that appropriations to defence in terms of the MTEF be amended as follows:

 

Financial year	Current proposal	Ceasefire proposal
2011/12	34 605	34 605
2012/13	41 800	34 605
2013/14	44 400	27 300
2014/15	47 000	20 000

 

It is envisaged that approximately 25 per cent of the savings would be offset by additional expenditure by other departments arising from transfers of functions from the SANDF. The remaining 75 per cent could be used for increasing government jobs in human security.

 

3.2 South African Local Government Association (SALGA)

 

3.2.1 General comments

 

The slowing economy affects local government revenue and service delivery. SALGA agreed that municipalities should reprioritise their budgets towards more investment in infrastructure. They welcomed the total of R5 billion added to local government allocations over the MTEF. However, they indicated that there is a need for empirical studies into the cost of service delivery in local government to inform the division of revenue between the different spheres of government.

 

3.2.2 Equitable share

 

The R2.2 billion added over the 2012 MTEF is less than a 10 per cent increase in the total Local Government Equitable Share (LGES) allocation. This increase is therefore a pass-on cost in relation to salaries and bulk services – not a net increase for local government budgets.

 

The rising cost of bulk services and demand for basic services require above inflation increases to the LGES. Municipalities have to provide for repairs and maintenance of infrastructure through which free basic services are delivered. The provision of basic services is gradually becoming unaffordable to municipalities.

 

SALGA will continue to participate in the process of the review of the LGES formula, hoping that it will result in a more equitable distribution of funds between municipalities based on their varying fiscal capacities; a new poverty line; more funds for rural municipalities and more services (like fire fighting and storm water drainage systems) being covered.

 

3.2.3 Conditional grants

 

SALGA noted the additional R2.8 billion for direct transfers and R994 million for indirect transfers to municipalities for the upgrading of informal settlements in cities and large towns and for bulk infrastructure and solid waste management in rural municipalities. However, they would also support further additions towards the following:

 

·         Integrated bulk raw water storage facilities to support service delivery in smaller, mainly rural, municipalities.

·         Funding for roads infrastructure management capacity in rural municipalities.

·         Targeted support towards improved capacity in rural municipalities such as the initiative for urban municipalities under the Urban Settlements Development Grant.

·         Municipalities should be better capacitated to plan and execute projects funded through conditional grants.

 

3.2.4 Other matters

 

Other matters raised by SALGA include the following:

 

·         The issue of unfunded mandates should be addressed. In their submission on the 2012/13 Division of Revenue, the Financial and Fiscal Commission (FFC) estimated the extent of unfunded mandates in metro municipalities at R4 billion per annum.

·         Ad-hoc national policies and legislative amendments are constraining sustainability of revenue of municipalities. Examples of this include the Administrative Adjudication of Road Traffic Offences Act, No. 46 of 1998 (AARTO), which is not functional and costs money; the National Energy Regulator of South Africa (NERSA) tariff processes that are not aligned to the MFMA budget process and rates ratios for categories of properties in terms of the Municipal Property Rates Act; and others.

·         National and provincial government must commit to pay outstanding property rates to municipalities.

·         Property data from the Deeds Office should be provided to municipalities free of charge. This will assist in improving billing integrity and achieving clean audits.

·         The National Treasury should develop a framework of revenue management that is applicable to all policy and legislative impacts on local government revenues. The framework should include a compulsory assessment of the implementation costs and should be revisited after two years to deal with any unintended consequences.

 

SALGA acknowledged the tight fiscal stance amid the national and global economic challenges, and undertook to impress upon its members the need to redirect spending towards frontline services, and to reduce non-core and ineffective expenditure. This would be done through Budget Week workshops to be conducted to prepare for the 2012/13 financial year and through a Financial Circular to members.

 

3.3 Financial and Fiscal Commission

 

3.3.1 Medium term spending priorities

 

(a)    Job creation

 

The Financial and Fiscal Commission (the FFC) welcomed the priority shift in government expenditure towards infrastructural investment as a critical vehicle through which to generate more jobs. However, in order to prevent the under-expenditure of funds earmarked for capital projects, they emphasised that adequate capacity is a critical concern for municipalities and provincial governments. In this regard, the FFC called for a greater focus on institutionalisation of project management, external auditing of budget expenditure, greater involvement of the private sector through public-private-partnerships, establishment of budgeting norms and standards as well as institutionalising life-cycle project management.

 

(b)    Health and Millennium Development Goals

 

South Africa has been making slow progress in achieving health-related millennium development goals (MDGs). Based on current trends, South Africa will not reach the MDGs for child mortality (Goal 4), maternal mortality (Goal 5) and HIV/AIDS, malaria and tuberculosis (Goal 6). The prioritisation of health’s MDGs in the 2011 MTBPS is in line with previous recommendations and findings of the FFC.

 

Government promises that steps will be taken over the MTEF period ahead to improve public health administration; accelerate the hospital revitalisation programme; and pilot district-based primary health services as part of the preparation for national health insurance (NHI). The FFC felt that there was a need for government to come up with a credible interim financing mechanism for NHI.

 

(c)     Social security

 

The main proposal in the 2011 MTBPS with respect to social security is to reprioritise funds already in the baselines towards strengthening selected child welfare programmes. The two main programmes to be supported are access to early childhood development services and, home and community based child care and protection. The FFC supports this proposal, but in the context of reforms to resolve more structural issues in the sector. FFC’s view is that funding should go with certain conditions, including establishing a viable monitoring system to track the quality of services provided. FFC argues that giving more money to the sector should be guided by the need for a serious policy review about the role of the State and the effectiveness of delivery models, as the current approach is not consistent with international good practice.

 

3.3.2 Division of revenue

 

After a net adjustment of R2.9 billion in the 2011/12 financial year, the total expenditure envelope grows from a revised R888 billion in the 2011/12 financial to R1 trillion by the 2014/15 financial year. Assuming the base year 2011’s consumer price inflation (CPI) of 5 per cent, this would mean that expenditure increases at an average real growth of approximately 2.3 per cent. Compared to the 2010 MTBPS growth rate of 2 per cent, the provincial allocations are growing at a slower rate. As a result, the share in allocations for national and local government is projected to grow, while that of provinces declines marginally from 44.9 per cent to 44.7 per cent over the MTEF. The share of national allocations remains stable over the MTEF at an average of 46.8 per cent, increasing slightly from the initial 46.7 per cent in the 2012/13 financial year in spite of the economic downturn. The local government fiscal framework remains buoyant, growing at a real rate of 3.4 per cent in the 2012/13 financial year and 3.6 per cent in the 2014/15 financial year. Provincial baselines grow by only 1.1 per cent while local government baselines grow by a healthy 4 per cent in real terms over the medium term. The FFC agreed with government that the latter is important to assist municipalities in the provision of free basic services to the poor, while the emphasis continues to be placed on the elimination of waste, corruption and inefficiency.

 

3.3.3          Adjustments to conditional grants

 

(a)    Provinces

 

A total amount of R753 million is allocated to enable provinces to deal with recent flood damage to infrastructure. This includes allocations for agriculture (R149.5 million); housing (R180 million); education (R180 million); transport (R240 million) and health (R2.6 million). The FFC felt that these amounts may not be adequate given the frequency of natural disasters. However, they welcomed Schedule 9 of the Division of Revenue Amendment Bill which facilitates the faster release of disaster conditional grants to affected areas.

 

(b)    Local government

 

The grants that are being rolled over from the 2010/11 financial year, include the following:

 

·         Water Services Operating Subsidy Grant (R3.5 million of Lephalale);

·         Rural Household Infrastructure Grant (R26 million fast-track rural households’ access to on-site water and sanitation); and

·         Regional Bulk Infrastructure Grant (R10.6 million).

 

The FFC welcomed the merging of the Integrated Housing and Human Settlements conditional grants with part of the Infrastructure Grant for metropolitan municipalities to form the Urban Settlements Development Grant. However, the FFC believed that a number of other infrastructure-related grants needed to be aligned, including the Regional Bulk Infrastructure Grant, the Electrification Grant and the Neighbourhood Development Grant.

 

3.4 The People’s Budget Coalition

 

3.4.1 Creation of decent work

 

With regard to the support in the MTBPS for job creation, training and community works, the People’s Budget Coalition (PBC) felt that the vehicles and mechanisms through which the proposed training will be realised, should have been clarified.

 

The PBC further felt that the MTBPS failed to address the challenge of infrastructure delivery mechanisms. In the PBC’s opinion, ways to build internal capacity to directly deliver basic services and public infrastructure should have been put forward.

 

3.4.2 Education

 

The MTBPS seeks to increase education funding from R191 billion to R232 billion over the next three years. In real terms, education spending will increase by 1.6 per cent over the next three years. There are severe backlogs in basic education and according to the PBC, the MTBPS should have laid the foundation to address these backlogs by ensuring that teacher colleges are re-opened and new ones are built. It should have ensured that resources are directed where they are needed most in schools. The PBC is of the view that the MTBPS should have addressed the demands of expanding the Further Education and Training sector through its resource allocations.

 

3.4.3 Health

 

The MTBPS mentions that health spending will increase by 7.4 per cent - or in real terms a 1.9 per cent increase. The PBC does not believe that this is enough to address the massive challenges faced in this area. These challenges include staff shortages; non-availability of medicines; infrastructure backlogs and inadequate systems. These challenges have generated negative outcomes like the increase in maternal mortality and a relatively high child mortality figure.

 

The MTBPS should have clarified the financing mechanism of the National Health Insurance (NHI) and made the necessary budgetary allocations to phase in the system.

 

3.4.4 Rural development, food security and land reform

 

The PBC welcomes the strengthening of local government in rural communities; the prioritisation of water infrastructure; the upgrading of waste water treatment works in rural areas; and the alignment of programmes between the Departments of Rural Development and Land Reform; Agriculture, Fisheries and Forestry; and Water Affairs.

 

However, the PBC is of the view that the MTBPS should have proposed measures to limit speculation on essential food items in financial markets. Furthermore, cost drivers faced by farmers, such as fertilizers, electricity, transport and water tariffs, should have been factored into the MTBPS.

 

Another concern raised by the PBC was that the MTBPS did not make mention of land redistribution, which lags far behind target.

 

3.4.5 Crime and corruption

 

The PBC indicated that the MTBPS should address the capacity of the police services, ensure adequate resources for institutions (especially community policing forums) and provide conditions for the criminal justice system to attract and retain highly skilled personnel to its department. Among interventions to deal with corruption in the system, is the improvement of the capacity of the Independent Complaints Directorate. However, the PBC is of the view that the best way to deal with corruption is to eliminate the use of tenders to deliver basic goods and services and to build the capacity of the State to directly deliver these and create jobs.

 

3.4.6 Other matters

 

The PBC emphasised the need to strengthen the technical capacity of Parliament to amend money bills, and in particular the establishment of a Parliamentary Budget Office (PBO). They indicated that they seek clarity regarding the details and progress made in the setting up of the PBO.

 

4. Findings

 

Having considered the 2011 MTBPS and the submissions by interested parties, the Select Committee on Appropriations made the following observations:

 

4.1 Concerns around capacity issues in local and provincial government in terms of increased spending on infrastructure, stem from the under-expenditure of capital conditional grants and imperfect performance monitoring mechanisms.

 

4.2 A number of stakeholders have called on the National Treasury to provide clarity on the financing mechanism of the National Health Insurance.

 

4.3 The People Budget Coalition has repeatedly requested clarity on the progress of the Parliamentary Budget Office as per the requirements of the Money Bills Amendment Procedure and Related Matters Act, No. 9 of 2009.

 

5. Recommendations

 

The Select Committee on Appropriations, having considered the 2011 Medium Term Budget Policy Statement and received comments and recommendations from interested parties, recommends to the House that the 2011 Medium Term Budget Policy Statement be supported.

 

The Select Committee on Appropriations further recommends the following:  

 

5.1 All government departments should ensure that capacity issues (especially in provincial and local government) are resolved urgently if the 2011 MTBPS goals with respect to infrastructure investment, education, health, rural development and others are to be achieved; and

 

5.2 The National Treasury should provide details regarding the financing of the National Health Insurance’s pilots and the overall National Health Insurance’s financing mechanism. It is critical that the process in choosing the most viable financing mechanism is transparent from the beginning of the process in order to secure buy-in from stakeholders, namely tax payers.

 

             

Report to be considered.