ATC080307: Report on Medium Term Expenditure Framework
Joint Budget Committee report on the Budget and Medium Term Expenditure Framework, dated 07 March 2008
“The economic expansion since 1994 has allowed public spending to rise rapidly in all areas…Over the period ahead, government’s spending plans again allow for a progressive extension of public services, informed by the “apex priorities” outlined by President Mbeki in the State of the Nation Address” – the Minister of Finance, Hon. T Manuel, Budget Speech 2008.
Having considered the Appropriation Bill [B 3-08 2008] (s77) and Division of Revenue 2008/09 [B 4-2008] (s76) (1) together with the Budget Review and Estimates of National Expenditure (ENE), and after reviewing the policy priorities as stated in the State of Nation Address (SONA), the Joint Budget Committee reports as follows:
The Minister of Finance, the Hon. T Manuel, on 20 February 2008 tabled the budget – along with the Budget Review and Estimates of National Expenditure (ENE) 2008/09-2010/11 which includes the Medium-Term Expenditure Framework (MTEF). The budget 2008 was then referred to the Joint Budget Committee (JBC) (ATC 17 and 18 - 2008) to consider in terms of its mandate. The Committee is mandated to “consider proposed allocations in the Medium-Term Expenditure Framework and the Appropriation Bill and whether these allocations are broadly in keeping with the policy directions of Government.”
The Committee, jointly with the Portfolio Committee on Finance, engaged with the Minister of Finance, National Treasury and the South African Revenue Services (SARS) on the budget and MTEF. Further engagements where held on the Financial and Fiscal Commission’s (FFC) recommendations for the Division of Revenue. The Committee then engaged separately with National Treasury on the Budget Review, with a focus on medium-term priorities and the division of resources across clusters.
This report is divided into three sections. Firstly, it comments on the fiscal framework, government priorities and the division of resources between spheres of government, secondly on the medium-term expenditure framework and the various government services and sectors and, lastly, on the Committee’s recommendations. The report is in preparation for the First Reading Debate on the Appropriation Bill.
2. THE FISCAL FRAMEWORK AND BUDGET PRIORITIES
Uncertainties in the global economy, rising inflation and supply constraints are expected to inhibit South Africa’s medium-term economic prospects, with growth projected to slow to around 4 percent in 2008, rising to over 4.5 percent by 2010. These factors could constrain government’s ability to meet its target of 6 percent annual growth by 2010. Notwithstanding these constraints government’s medium-term social and economic objectives have been adequately funded for effective implementation. These objectives, as set out in the government’s programme of action and MTBPS, include:
· Investing in both economic and social infrastructure to facilitate economic growth and access to basic services;
· Improving education, health and other services to reduce poverty;
· Enhancing job creation by supporting labour-absorbing industries and expanding employment-intensive government programmes;
· Improving the efficacy of police services and the justice system; and
· Enhancing the effectiveness of economic and sectoral interventions through the regulation of and support for business.
These objectives are further defined through the identification of 24 apex priorities for the forthcoming year. Specific interventions include, inter alia, expanding industrial policy, implementing a campaign to save electricity, consolidating skills development initiatives, strengthening the machinery of state, accelerating employment and poverty alleviation programmes and revamping the criminal justice system.
To accomplish government’s developmental objectives, the 2008 budget and MTEF propose that an additional R115.6 billion be added to the fiscus over the medium-term. Of the additional R115.6 billion, R78 billion is made available to national government, R45 billion for provincial government and R14 billion for local government.
The Committee believes that for these additions to advance government’s developmental agenda and enhance service delivery they must be accompanied by robust departmental planning, implementation, monitoring and timeous reporting. The Committee has consistently identified the misalignment of government planning, budgeting, and financial management. This includes under-spending, excessive virements i.e. shifting of funds between programmes, and wasteful expenditure – which becomes increasingly evident towards the end of the financial year.
Government has set a target of realizing efficiency savings of R2.3 billion over the next three years. Departments should clearly define how they intend to contribute to meeting this target. The Committee, in its report on the 2007 MTBPS (ATC: 137- 2007), asked National Treasury to develop a monitoring mechanism for government and report progress on this initiative.
The Committee has also taken cognisance of reforms to departmental budget formats as reflected in the ENE, and specifically, as part of the Performance Information Framework, the inclusion of quantifiable objectives and performance indicators for each department. The Committee considers this as an extremely important development as it will provide the foundation for results-based budgeting and improve oversight. The Committee will continue to engage National Treasury on the budget format.
3. GOVERNMENT SERVICES AND THE MEDIUM TERM EXPENDITURE FRAMEWORK
Governance and Administration
While the steady expansion of the fiscus is encouraging, the Committee maintains that improved delivery is only possible if government develops the capacity to absorb and spend resources effectively and efficiently. Although government expenditure has improved, the Committee has noted ongoing challenges in spending across all levels of government, which have compromised better service delivery. The situation is acknowledged by National Treasury that: “growth in public spending has not been matched by a concomitant improvement in service delivery”.
Given the capacity constraints, the Committee agrees with the emphasis given in the budget to training and capacity-building initiatives. Training expenditure in national departments is set to grow by 15 percent over the next three years. Government should give clear indicators on training and capacity-building targets. As highlighted in the MTBPS report, it is essential that the South African Management Development Institute (SAMDI), which receives an additional R103 million over the MTEF, complete its restructuring process and focus on implementation. It must also ensure that training programmes are of a high quality and are fully implemented.
The Committee is of the opinion that the recurring departmental vacancies are having a negative impact on budgeting, spending and service delivery. However government’s commitment to fill key posts during this year is a positive step but is not sufficient. The Committee believes that government should extend this commitment, which must be acted upon, to all vacancies. In addition, there should be a clear correlation between human resource plans and budgets in order to avoid excessive virements, especially from compensation of employees, later in the year. The Committee will continue to monitor this phenomenon closely and intervene if this trend persists.
The integration of planning and information systems are prerequisites for efficiency. Government has consequently undertaken to further align national, provincial and local development plans. Given the severe capacity shortcomings in many municipalities measures should be taken to ensure that the R1.5 billion allocated to modernise local government budgeting and financial management systems is well-spent. These resources must be matched by a discernible improvement in financial management and the delivery of basic services.
As part of the turnaround strategy to improve the capacity and organization of the Department of Home Affairs (DoHA), the budget proposes an additional R1.9 billion for the Department. Despite progress made, the Committee has observed ongoing deficiencies, which continue to frustrate citizens and undermine wider efforts in the public service.
Economic Services and Infrastructure
To stimulate economic development and job creation, the budget and MTEF provide a prudent R2.3 billion for industrial policy initiatives and a further R5 billion in tax incentives. The Committee agrees with these allocations but the swift implementation of the Industrial Policy Action Plan is fundamental.
The Committee is aware that agriculture’s contribution to the economy is well below its potential, which compromises exports and food security. At the same time there is a pressing need to finalize land restitution and accelerate distribution. While the budget provides a significant cash injection for these sectors, it is important that the departments of Land Affairs (DoLA) and Agriculture (DoA) overcome their organizational deficiencies. Given the challenges there is a risk that the allocated funds will not be efficiently, effectively and economically utilized. The challenges confronting the Land Bank should also be addressed as a priority to overcome wasteful and fruitless expenditure.
Public infrastructure and capital investment are prerequisites for sustained growth, employment creation and the hosting a successful 2010 World Cup. The budget and MTEF reflect a strong emphasis on infrastructure investment with expenditure set to rise from R124 billion in 2007/08 to R210 billion in 2010/11 – a 1.5 percent increase as a percent of GDP. A large share of proposed investment has been earmarked for the built environment. Although significant, infrastructure spending needs to accelerate over the long term.
Economic development depends on efficient transport systems. The budget and MTEF reflect strong growth in the transport sector, with expenditure set to reach R23 billion by 2010/11. The Committee agrees with the need for accelerated investment in this sector but budgetary expansion must be matched by the simultaneous expansion of monitoring and evaluation systems.
The housing sector budget is set to increase at an annual average rate of 19.1 percent between 2007/08 and 2010/11, more than any other. As underlined in the MTBPS report, the lack of capacity in the national Department of Housing (DoH), provinces and municipalities as well as weaknesses in co-ordination could hamper service delivery.
Power shortages have reached critical proportions over the past months, jeopardizing government’s economic development programmes. Investment in generation capacity and energy conservation is therefore an urgent and obvious priority. Government has indicated that it will invest up to R60 billion inEskom over the next five years, of which an estimated R20 billion will be spent over the MTEF period. This is a substantial and long-term investment in the economy.
While infrastructure expenditure has steadily improved it is critical that planning and delivery of infrastructure is better aligned. This synchronization will ensure optimal spending. It remains imperative for capital projects to be accompanied by comprehensive maintenance plans, and the associated risks and costs reduced through effective planning and monitoring. In this regard, the Committee notes progress with the Infrastructure Delivery Implementation Programme (IDIP) and looks forward to a report on the proposed integrated infrastructure plan.
The skills deficit remains a serious and binding constraint. The budget reflects a renewed emphasis on skills development – R1.4 billion is earmarked for the Further Education and Training (FET) colleges and spending by the Sector Education and Training Authorities (SETA’s) is projected to rise from R6.8billion in 2007/08 to R9.1 billion by 2010/11. For these resources to be of maximum benefit, however, the Committee is convinced that there should be closer alignment between the programmes and curricula of these institutions and a higher employment rate for graduates. In executing its oversight function the Committee will call on government to report quarterly on progress with the implementation of the findings of the recent SETA review.
Social Services and Poverty Reduction
The social services continue to receive the largest share of revenue – 59.2 percent of total expenditure for the budget period, growing to 60.5 percent over the MTEF.
Social assistance and welfare grants are important instruments in addressing poverty. The budget and MTEF provide for the steady expansion of grants with an additional R12 billion for inflation-related increases and the extension of the Child Support Grant and Old Age Pension. These additions result in the social welfare sector growing by an annual average rate of 10.8 percent over the medium term. The expansion of the social net is welcome however grants should be effectively administered to ensure that funds reach the intended recipients within a reasonable time.
In terms of the ongoing reforms to the social security system, the Committee has identified a number of proposals that will have far-reaching budgeting implications for the sector. The Committee has also noted the suggestion to attach conditions to certain grants – such as linking the Child Support Grant to school attendance – however such conditions could exclude the marginalized unless government is able to simultaneously guarantee access to basic services. The Committee intends pursuing its oversight in this sector.
Education is recognized as pivotal to sustained growth and reducing inequality and as the foundation of a developmental state. The budget and MTEF proposals provide continued financial support for the sector – which grows at an average annual rate of 11.5 percent between 2007/08 and 2010/11. As highlighted in the 2007 MTBPS report, however, the sector has experienced a number of organizational and budgeting challenges, which have, at times, led to serious disjuncture between resources and outcomes.
The health sector is facing a number of acute challenges including the lack of personnel and inadequate infrastructure and capital equipment, which has compromised the provision of basic health services. The Committee notes the continued growth in the sector, with expenditure set to rise by an average annual rate of 10.6 percent. While these resources are necessary, planning and co-ordination in the sector as well as the capacity of the relevant departments to spend effectively remains a concern. The projected under-expenditure by a number of provinces on hospital revitalization for 2007/08 is an example.
In this regard, the implementation of concurrent functions and the apparent failure by certain provinces to support national priorities remains an extremely serious matter that should be urgently rectified. The Committee is also of the view that the performance of the social services, especially in the departments of education and health, is relatively difficult to quantify. Despite the increased allocations to education and health, the Committee is of the opinion that these are not commensurate qualitatively with the outcomes.
Justice and Protection Services
Crime remains at unacceptable levels, a situation which compromises both citizen security and government’s social and economic initiatives. To reduce crime to target levels, government has undertaken to revamp the criminal justice system as an apex priority.
The significant allocation of resources, over the MTEF period, to the Justice and Protection cluster, is not effectively aligned with the stated outputs and outcomes. It is imperative that an improvement in service delivery is linked to planned expenditure. More robust measures should be implemented in the financial management and the reporting systems of the cluster. The Committee expects the relevant institutions and departments to finalize institutional arrangements and recruitment processes within the shortest possible time.
The Committee appreciates the urgent need for new correctional facilities but is not convinced that the department has the capacity to spend additional funds effectively in this financial year, although the bulk of additional funds are earmarked for 2010/11. Construction projects are typically high-risk in nature – highlighted by the delays in the finalization of the Kimberley Correctional Centre. The Department of Correctional Services (DCS) should satisfy Parliament that it has taken account of all risks and operational implications relating to these projects.
4. CONCLUDING REMARKS AND RECOMMENDATIONS
The allocations proposed in the budget and MTEF are broadly in line with the policy priorities of government. However, the Joint Budget Committee has identified various challenges and has reservations about the ability of certain sectors and departments to absorb additional funds and spend their budgets with maximum effectiveness and efficiency. Having scrutinized the bills before it, participated in the budget hearings and subsequently deliberated, the Committee has made following recommendations.
1. Based on the directive in the State of the Nation Address of “Business Unusual”, departments must ensure that they spend their budgets in line with national priorities and their strategic plans, and avoid the current ad hoc utilization of virements.
2. National Departments should report to Parliament on spending, including transfers to provinces and public entities in meeting national priorities. Such reports should routinely include non-financial, performance information.
3. Departments should accelerate the establishment of sound administrative and financial systems to create an environment for effective and efficient financial management. The development of realistic key performance indicators should be included in this exercise.
4. To effectively reduce the current unacceptably high vacancy rates, affected departments should establish specific timeframes and furnish the JBC, on quarterly basis, with the progress in the filling of funded vacant posts. Notwithstanding the vacancy rate, effective and efficient service delivery goes beyond the deployment of funds and personnel and requires competency and commitment. The Committee therefore calls for a recommitment to the Batho Pele principles by all public servants.
Lastly, the Co-Chairperson would like to thank all those involved in the budget hearings and in the compilation of the report.
Report to be considered.
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