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IDASA: Pre-Budget briefing 2006

Budget Information Services - IDASA

8 February 2006

SARPN acknowledges IDASA as the source of this document:
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The proposed medium-term expenditure framework (MTEF 2006) takes place against a background of improved economic growth prospects, favourable inflation numbers, and a deficit position that is ripe for widening in coming years.

Government projects an average economic growth rate of approximately 4.5 per cent over the next three years. Although economic growth is strongly fuelled by consumer demand, by announcing a comprehensive package of infrastructure spending, government intends to broaden the benefits of economic growth and impacts directly on the lives of the unemployed. In spite of government's much vaunted expansionary fiscal stance since 2001, a range of factors conspired to bring the deficit on the main budget to 1.0 per cent of the Gross Domestic Product (GDP) in 2005/06. These factors are in-year savings and lower than expected spending in the 2005/06 financial year. The MTBPS 2005 projects a growing deficit of 2.2 per cent in 2007/08, while in 2008/09, the projected deficit is reduced to 2.0 per cent of GDP. So, while real spending in the budget is set to increase, government has stuck to an affordable fiscal and policy regime. This is reflected in the primary balance, which although approaching the zero mark in outer years of the new MTEF, remains positive throughout the duration of the MTEF. If we further consider expected revenue overruns of approximately R30-50 billion, the scene is set for robust increases to the expenditure framework.

Government expenditure (exclusive of debt service costs) is projected to grow at a real average annual rate of 6.3 per cent over the new MTEF. These resources are intended for service delivery and therefore prompt questions about the underlying assumptions of the proposed budget framework. Budget 2006 is premised on further control of the consolidated national and provincial wage bill and the slowing down of social development spending that has characterised recent budgets. Compensation is projected to grow at a real average annual rate of 4.1 per cent, while transfers to households (of which social grant payments are the main component) grow at a real average annual rate of 5.0 per cent. With the latter, annual growth rates of 4.7 per cent and 2.8 per cent in 2007 and 2008, contrast strongly with growth rates of 7.6 per cent in 2006 and 10.3 per cent in 2005. Slower real growth in wages and household transfer payments releases more resources for capital (infrastructure) spending and other categories of spending that are crucial for improving the quality of service delivery at provincial and local government levels. These developments affect service delivery in a number of ways:

  • In social services, education expenditure is allowed to grow faster than social development and health expenditure, unlike trends in previous years. Also, to fund government's fee-free policy in public schools, more resources would flow to the non-personnel/non-capital budgets (NPNC) of education departments. With the proposed allocation of resources, we also expect more resources for capital expenditure, even though the exact balance or trade-off between NPNC and capital expenditure is not clear at this stage.

  • In social development, greater attention will be put on the funding of welfare services at provincial level. Important legislation for children and older persons will receive attention. However, MTBPS 2005 did not provide estimates of the magnitude of such increases.

  • Further capital spending in health, especially in relation to the acquisition of key medical supplies (goods and services) and further refurbishments (both maintenance and capital spending) to hospitals.

  • Projected increases to the economic service sector where infrastructure plans for the roads and transport sectors are in the offing. The latest provincial level spending figures suggest that expenditure expansion in these areas is not unjustified, especially given the relatively high levels of spending on roads and transport votes at provincial level.

  • The expansion of housing services in line with the comprehensive plan for the development of sustainable human settlements.

  • In the justice and protection sector, government is trying to develop an appropriate balance between salary and other related cost categories.
The assumptions of the 2006 budget framework are also reflected in the division of nationally collected revenue among the three spheres. Consistent with their service delivery burdens, provinces and local government achieve the largest real average annual growth rates over the new MTEF. Although the local government sphere is projected to grow at a real average annual rate of 20 per cent, the bulk of these increases relate to transfer payments to local government in 2006 to compensate them for the loss of RSC levies. Thereafter, local government is projected to grow by 5.7 per cent and 7.4 per cent in 2007 and 2008 respectively. Additional allocations to the local government sphere total R 2 billion over the new MTEF. Provinces' share of national revenue is projected to grow on average by 6.3 per cent over the next three years, which translates into R31 billion more over the previous year's budget estimates.

Quality basic services in the context of provincial services invariably involve the issue of the composition of spending. Thus the national-level attempt at moderating personnel expenditure enables provincial education and health departments to focus on inputs that increase the quality of service delivery. This requires an increase in the discretionary spending power of provinces, which is duly proposed in the 2006 budget framework. The provincial equitable share is projected to grow by 6.3 per cent in real average annual terms and should therefore fund key innovations and changes in the education, health and housing portfolios at provincial level. Adding social development spending to the mix, these latest developments confirm that the heart of government's anti-poverty strategy is located in the social services sector. In the trade-off between the provision of direct services and the direct transfer of income, the 2006 MTEF is weighted more heavily in favour of the former.

So what are other key expenditure issues and trade-offs that should be carefully looked at in the upcoming budget 2006?

  • On the HIV/AIDS front, the MTBPS 2005 revealed that the community and home based care grant for those affected and infected by HIV/AIDS would be incorporated into the provincial equitable share. Given social development departments' lack of readiness to utilise equitable share funding for HIV/AIDS, we need to carefully track the allocations to community and home based care in budget 2006, especially in the provincial budgets.

  • We also need to track whether the size of the health Comprehensive HIV and AIDS Grant approximates increased demand for ARV treatment by AIDS patients.

  • Although the announcement of an additional R372 billion in infrastructure spending is welcome, we await details about whether these projects are sufficiently close to where the bulk of the urban poor live.

  • The extent and magnitude of the progress provinces made in improving capital expenditure in education, health and housing. The answer to this question would provide an assessment of the validity of the assumption of increased capital expenditure in provinces generally and in social services more specifically.

  • Measures to alleviate the debilitating effects of unemployment: Budget 2006 is strong on providing shared fiscal benefits to those in formal education and recipients of grant spending, but less clear on those that fall outside these categories (unemployed youth and adults). Recent evidence that points to the ease with which people fall back into poverty should bring closer scrutiny on these proposals in Budget 2006.

  • The extent and magnitude of resources put aside for social welfare at the provincial level (excluding social security grant payments to households). Given the under-funding of these areas, MTBPS 2005 was too vague in its overall commitment to better funding of these key areas.

  • Following from the last point and given government's intention of developing human resources, allocations to adult basic education and training programmes should be carefully looked at.

  • We also need to carefully assess to what extent budget reform has resulted in more meaningful non-financial information in Budget 2006. Although this should be tracked in budget documentation and strategic plans, good information in the budget should allow convenient assessment of the effectiveness and efficiency of spending.

IDASA Budget day 2006 contact persons:
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