1. Compensation Budgets Portfolio Committee on Home Affairs
Dondo Mogajane, Acting DG: National Treasury
30 May 2017

2. The basic budget equation
Expenditure = Revenue + Borrowing
EXPENDITURE
REVENUE
BORROWING
Inputs, outputs and impacts
Effective allocations
Efficiency
Economic growth and revenue collection
Tax rates and economic growth
Tax policy and tax administration
Taxpayer compliance, tax morality and the Laffer curve
Growth and Sustainability
Growth and interest rates
Credibility
Ability to pay vs. willingness to pay

3. The main aim of the 2016 Budget was to close the gap between spending and revenue
Main budget revenue and non-interest expenditure

4. A nominal expenditure ceiling was introduced in 2012
From 2012 government announced it would treat the MTEF estimate of main budget non-interest expenditure as a ceiling
Prior to the introduction of the ceiling, government typically added very large amounts to spending over each year of the MTEF
Clearly, the absence of a numerical target has weakened the impact of the medium-term framework as far as a hard expenditure constraint
Difference between third-year forward estimate and expenditure outcome
Main budget expenditure

5. Parliamentary process
Individual portfolio committees consider the budget and strategic plan for each department
The budget is considered by standing committees on finance and appropriations comprising members of both houses
Fiscal Framework approved/amended, then Division of Revenue and then Appropriation Bill
In respect of the MTBPS, reports are issued by Parliament on the medium term expenditure framework’s fiscal framework and division of revenue, before the executive finalises the budget
Parliamentary Committees table Budgetary Review and Recommendation Reports
National Budget tabled includes response to BRRRs, MTBPS Fiscal Framework and Division of Revenue
National Treasury briefs Parliamentary Committees on the documents/ bills tabled at different points in the Budget cycle
National Treasury provides quarterly expenditure reports to Parliamentary Committees
Public accounts committee deals with post-facto issues raised by auditor general

6. Recap of key cabinet decisions on fiscal consolidation
On 12 January 2016 Cabinet approved:
Additions to tax revenue through policy measures amounting to R18 billion 2016/17, and R15 billion in the subsequent two fiscal years.
Reductions in the expenditure ceiling of R10 billion in 2017/18, and R15 billion in 2018/19
These reductions were targeted at CoE budgets
These measures were tabled in Parliament in the 2016 Budget in February
On 29 September, Cabinet approved:
The Fiscal Framework, the Division of Revenue for the 2017 MTEF and major changes to conditional grants
Further reductions to expenditure of R10bn in 2017/18 and R16bn in 2018/19
Further additions to tax revenue of R13 billion in 2017/18
In addition Cabinet agreed on the need to provide additional funding to universities, amounting to more than R17 billion over the MTEF, which would need to be funded by further cuts in other baselines expenditures.
These measures were tabled in Parliament in the 2016 MTBPS and in the Budget

7. Cabinet decisions on compensation budgets (1)
On 13 Jan 2016 Cabinet approved CoE baseline reductions of R10bn in 17/18 and R15 bn in 18/19.
These reductions were distributed across all national and provincial depts, with a larger portion of the reduction made to national votes,
Proportionally larger reductions were to be implemented for centre of govt, administrative and policy depts, as the reductions were focussed on reducing CoE in administrative functions of govt. This was effected through a first round 1% cut on the CoE ceiling of such depts, like the NT, DPME, DTI, etc.
Adjustments should be made to ensure that OSD intensive depts are excluded from the reductions in relation to all OSD positions.
The total national compensation baseline was consequently reduced by R5.2bn in 2017/18 and R8.2bn in 2018/19
On average, the compensation baselines of national depts were reduced by 6.7 per cent in 2017/18 and 10 per cent in 2018/19 in Budget 2016.

8. Cabinet decisions on compensation budgets (2)
In preparation for Budget 2016 an analysis of CoE budgets revealed that a number of national depts had provision for the filling of vacancies within baselines.
During the 2016 MTEC process these reserves were identified and ring-fenced as a compensation reserve, to be allocated only if required by depts. These reserves amounted to R1.8bn in 2017/18 and R1.6bn in 2018/19, R3.4bn in total.
January 2016 Cabinet decided that these reserves were to be entirely rescinded in order to partially fund the R25bn in reductions required for university subsidies and NSFAS in the Budget.
A number of national depts, e.g Depts of Defence, Corrections and Police, a large portion of the reductions were financed through the compensation reserve, in other words through existing vacancies.

9. Cabinet decisions on compensation budgets (3)
The 2016 MTBPS introduced further reductions to compensation budgets, due to adverse economic conditions and further resource requirements in the post-school education sector.
Cabinet approved further baseline reductions of 1.1 per cent to the compensation baselines of national departments.
These reductions were implemented in Budget 2017 and amounted to R437.2 million for 2017/18 and R470.9 million for 2018/19 and R497.3 million in 2019/20, a total of R1.4 billion over the MTEF.
These reductions were focussed on depts that absorbed lower proportions of reductions in the previous process. So for example depts that had existing budget pressures, like the Depts of Defence, Police and DIRCO, were excluded from the process.

10. Compensation pressures are acute
Provincial governments continue to reduce headcounts, mainly through attrition.
Many national departments have not adjusted their operations to reflect their budgets. Some have continued recruitment, which will result in even larger shortfalls in 2017/18
As a result many national departments will face great difficulty in sustaining headcounts in the next three years.
DPSA is working on a revised approach to give managers more flexibility in managing this problem.
The current three-year agreement with labour expires in 2017/18. If a CPI related wage settlement (or less) can be agreed thereafter, significant pressure will be taken off the budget

11. 2017/18 budget outlook

12. Without a moderate three-year agreement, headcounts will need to fall

13. Human resources budget plans
In recognition of the pressures, NT introduced “Human Resource Budget Plan” tools, with guidance into the 2017 budget process.
The idea was to get a grip on the numbers, encourage departments to plan accordingly, and provide a basis for further engagement and discussion with a view to solving problems.
Compliance with HRBP requirements
Most departments submitted HRBPs very late in the process.
In many cases, there was poor involvement of HR function; tool populated unilaterally by Finance staff
In other cases there was lack of top management and executive buy-in and signoff
Some departments complied with requirements nominally; whilst others did not (we are engaging)
Budget Implementation Monitoring
HRBP implementation is being monitored on a monthly basis
Departmental engagements will happen in relation to key risks identified

14. Headcount management
National Treasury has been working with DPSA to develop guidance for departments on the management of headcounts.
DPSA guidance on headcount management
Comprehensive guidance on under development for finalisation by end June 2017
Enhancements to exit mechanisms are being explored to improve take-up rates
Engagements under way with relevant parties to minimise loss of critical skills though purposeful targeting
Funding of exits from the public service
Some exit mechanisms involve upfront costs for the fiscus; decision to be taken on funding modalities
Costs associated with exits could be recouped within a three year period, if those exiting are not replaced

15. Public sector wage negotiations
Earnings growth in public service
Non-SMS personnel salaries increased by 7.8% per year on average since 2008/09
Inflation posted average increase of 6.0% per year over same period
Salaries increased faster than inflation by 1.8 percentage points per year, excluding effect of progression, promotions and introduction of OSD
Increases not sustainable and crowd out other productive areas of expenditure
Salary negotiations
2015 salary agreement expires on 31 March 2018
2017 round of negotiations to commence in October 2017
Review of outstanding matters as well as pre-negotiation processes to be conducted between May and October 2017
Less favourable wage settlement will impose further pressures on departments. Departments will be expected to manage within available budgets
Negotiation protocol
MPSA is due to table proposal on intergovernmental structures to the Mandate Committee
Consultation with provinces will begin after Mandate Committee approves proposal

16. SUMMARY
In order to achieve govt’s fiscal objectives, cabinet has agreed to a path of fiscal consolidation that included cuts to compensation budgets.
Core problem: Although cabinet took clear and explicit decisions in respect of CoE budgets more than a year ago, some Depts have not taken action to implement these decisions or taken responsibility to ensure they are adhered to. Head counts continue to grow
As cabinet prepares for the MTBPS, a critical question will be the path of fiscal consolidation, which cabinet is at liberty to adjust.
NT will continue to present options in this regard, and advise cabinet on the likely consequences of perusing one option or another.
Until clear decisions are finalised, NT will continue to implement its mandate.

17. SUMMARY
Accounting Officers (AOs) have a legal obligation to operate within the budget limits appropriated by Parliament.
This includes specific and exclusive appropriations in terms of the currently proposed appropriation act, which Parliament is in the process of adopting
AOs that do not take action to ensure that they remain within the appropriate budgets are guilty of serious financial misconduct.
Variations to current appropriations act can only be considered in terms of the adjustments appropriation bill
Consideration of such adjustments will take account of the efforts of the AO to meet the limits set in the budget and other objective factors
It is only in exceptional circumstances that overall departmental expenditure limits will be raised

18. Summary
This means that any departments that are unable to function within their departmental expenditure limits will need to find additional resources within their votes
Such additional resources found within the department’s baseline can NOT include conditional grants to other spheres of government. Under no circumstances will the overall national expenditure limit (set by the division of revenue act) be breached
If a national departments overall expenditure limit is to be adjusted, this will necessitate cuts to the expenditure limits of all other national departments
In general, budgets over the MTEF (i.e. from 2018/19 onwards) will not change, even if in-year budgets are adjusted. In such cases, AOs will have time to adjust their headcounts, but the medium ceiling will remain in place

19. Thank you