2. Kuben Naidoo 21 June 2007 A summary of the budget process

3. Overview The budget must meet 3 functions –Spending, taxation and borrowing must support economic objectives –Resources must be allocated to where political priorities are –Budget and budget info must be tools to improve quality and effectiveness of spending Constitution –Establishes three distinct but interrelated spheres, each with an elected executive –Assigns powers and functions to each of the three spheres –Forces spheres to cooperate in the delivery of concurrent functions –Assigns revenue sources by sphere The budget is a key statement of policy of the government. It is the process through which choices have to be made about competing priorities.

4. Scope of the budget For the budget to meet it’s three objectives, it must: –Be as comprehensive in covering the public sector as possible –This includes: State owned enterprises Sub-national governments, spheres, agencies, utilities etc Donor receipts (both cash and in-kind) This allows for proper resources allocation This process can be evolutionary, gradually expanding the scope of the public finances

5. The medium term expenditure framework “In 1997, we adopted a multi-year budgeting system We budget for three years, but revise this annually We use the concept of a rolling three year framework We also have a medium term budget policy statement which sets out: –Key priorities –Size of the spending envelope –Division of revenue between 3 spheres –Allocations to major conditional grants

6. How the MTEF works Government runs a rolling 3 year budget process Lets assume the police budget published in 2006 is as follows –R100 in 2006/07, R105 in 2007/08 and R110 in 2008/09 For the 2007 budget, the R105 and the R110 are the baseline figures for police To get the new third year, we increase the R110 by 6% or something, lets call it R116 in 2009/10 Now we have a baseline of R105 in 2007/08, R110 in 2008/09 and R116 in 2009/10 This is practically guaranteed to police They then bid for extra resources over baseline Let’s assume that we give them R5, R10 and R20, then their new budget is R110 in 2007/08, R120 in 2008/09 and R136 in 2009/10 In the speech, we say that we have added R35 of new money to police… …or we say that we have added R35 to the baseline for police In each budget, only a small part of total spending is subject to active decision making –In the 2006, only 5.8% of total spending was the subject of the budget process

7. MTEF budget process April June July Aug Sept Oct Propose fiscal and budget framework, and division of resources Policy reviewDepartmental planning and budgeting Sector and focused budget hearings Review, evaluate and decide on new major policy proposals. Departments prepare budget,including detailed spendingplans for new proposals. Intergovernmental andtechnical forums Table Medium Term Budget Policy Statement Executive/s consider frameworks and division of resources

8. MTEF budget process Nov Jan Feb March April/ May National Budget tabled Policy reviewDepartmental planning and budgeting Departments revise medium term plans and finalise budget inputs Cabinet approves new MTEF Provincial budgets are tabled Parliamentary process

9. The medium term budget policy statement, containing the key priorities, is discussed in parliament –Report issued before executive finalises the budget The budget is dealt with by a joint budget committee comprising members of both houses Individual portfolio committees dissect budget and strategic plan for each department Parliament votes on the Appropriation bill –Can approve or reject, but not change Parliament looks at quarterly spending reports Public accounts committee deals with post-facto issues raised by auditor general

10. Tax Revenue Borrowings Expenditure Debt Servicing Contingency reserve Available Expenditure Policy discussions at Cabinet Fiscal Framework

11. Available Expenditure National Share Provincial Share Local Share Policy discussions at Budget Council, Cabinet Policy discussions at Cabinet Division of Revenue

12. Division of revenue 2003/04 2009/10

13. The 2007 Budget Process Political priorities –Accelerate infrastructure spending Mainly housing and related –Budget fully for 2010 FIFA World Cup –Grow personnel spending in certain areas More personnel in police, health Higher pay for teachers, nurses, prosecutors –Skills development, especially further and education –Fighting crime –Regional and international support, especially peace keeping operations

14. Fiscal stance Macroeconomic outlook –Economy growing above trend growth –Revenue buoyancy very strong –Current account deficit rising Fiscal stance –Not much need for tax cuts due to robust growth –Strong growth in spending, but not as fast as revenue growth –Need to hold some back due to some revenue being cyclical –Decision to table a budget surplus for first time in history –Additional spending envelope R89 billion over three years R17.8 billion in 2007/08 R26.2 billion in 2008/09 R45.4 billion in 2009/10

15. Division of revenue Priorities dictate relative growth of shares Additional equitable share transfer to provinces –R24.6 billion Additional conditional grants to provinces –R14.6 billion Additional transfers to local government –R20.3 billion Of which R7.8 billion was for stadiums Remaining R33 billion to national departments

16. Medium term expenditure committee National department then runs a process to allocate between the departments Provinces run their own processes Departments are asked to interrogate their own baselines to absorb new priorities Treasury evaluates budget submissions MTEC listens to departments’ presentations –Asks tough questions Makes recommendations to ministers committee on the budget MinComBud make final decisions before budget is taken to cabinet

18. Skills, education, health and welfare Budget for assistance grants to households increase from R58 billion in 2006/07 to R74 billion in 2009/10 R8.1 billion to teachers’ pay progression, increase the number of clerical and support staff in schools; R2,2 billion for higher education subsidy; R850 million for adult literacy programme Additional R4,6 billion for new remuneration dispensation for health professionals, through the provincial equitable share R 1,7 billion for comprehensive HIV and AIDS programme R1 billion hospital revitalisation for 26 hospitals

19. Infrastructure and economic services R13.3 billion – 2010 FIFA World Cup stadiums and supporting infrastructure R7.4 billion – national roads, rail and provincial infrastructure R1,6 billion for targeted sector support and incentive schemes Additional R125 million for the expanded public works programme for monitoring and evaluation functions Infrastructure grant for provinces increased by R4.3 billion up to R21 billion R2.7 billion for integrated housing and human settlement development grant

20. Public administration and crime prevention R2,4 billion for policing equipment, facilities and personnel R1,5 billion to improve the administration of justice Correctional facilities and security systems is allocated R2,9 billion R4.3 billion for defence modernisation and military skills development R1,1 billion for service delivery improvement in Home Affairs R1.3 billion to SARS for core systems and upgrade of customs scanners

21. Programme budgeting Programme budgeting is where the main division of the budget is by programme A programme is a group of activities that produce one or more outputs In the past, we had line item budgets –This meant that the budget listed spending on travel, phone accounts, uniforms, books, fuel etc. –It did not specify what the purpose or output of the spending was –If you cut the travel budget or the fuel budget, what are you delivering less off? One cannot tell –Similarly, if I wanted to spend more on improving the parks, how would I do it Programme budgeting groups that same spending under different headings So a municipality can see how much it spends on parks or refuse collection or fixing street lights In that way we can add to or cut a programme based on our priorities Programme budgeting is a prerequisite for many other budget reforms

22. Example: policing Under line item budgeting, the police budget would look like: –Personnel Rx billion –VehiclesRy billion –IT systemsRz billion –FuelRxx million –UniformsRyy million –FirearmsRtt million With this type of budget, we cannot make sound decisions on priorities We cannot increase training, because we don’t know how much we spend on training We cannot increase the number of detectives because we don’t have the info Similarly, we cannot move personnel from one area to another

23. Example: policing Under programme budgeting, we can see the main activities of the police service We can make sound decisions on priorities

24. Economic classification also more sensible

25. Role-players Cabinet Ministers’ Committee on the Budget Budget Council (Minister and provincial MECs for Finance) Budget Forum (Budget Council plus local govt) Intergovernmental technical forums Departments Financial and Fiscal Commission Legislatures NEDLAC

26. Budget documents Appropriation Bills –Current, capital and transfers –Amounts exclusively appropriated –Adjustments appropriation bills ENE –All national departments and agencies –Policy developments and service delivery achievements and commitments alongside 7 year numbers –Includes financials on select number of public entities Peoples’ Guide –A popular version of the main points in the budget Division of Revenue Bill –How national raised revenue is divided between levels of government –Conditions of certain types of expenditure Budget review –Economic outlook –Fiscal Policy –Tax policy –Assets and liabilities –Budget priorities –Medium term expenditure and division of resources In year reports –Quarterly spending and revenue reports