Budget process government spending

The budget process and government spending in South Africa

National Treasury, July 2014

Presenter: Mampho Modise| Fiscal Policy, Budget Office, National Treasury

Budget is compiled for three years but revised annually

2013/14

2014/15

2015/16

2013 MTEF

Changes to baseline

• Revised macroeconomic and fiscal framework

• 3rd year = forecast inflationary increase on 2nd year

• Budget cuts

• Technical adjustments

2014/15

2015/16

2016/17

2014 MTEF

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The structure of government accounts

Main budget

Consolidated national budget

Plus: local government

Consolidated general government

Plus: Extra budgetary institutions and entities

Plus: Provinces

Plus: Social security funds and RDP funds

Consolidated national and provincial accounts

Consolidated government accounts

National government

Plus: state owned enterprises

Public sector

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National Treasury’s role

• Provide the overall Fiscal Framework based on the macroeconomic forecast

• Propose the Division of Revenue between the 3 spheres based on the above, and decisions made at a political level on priorities

• Provide technical guidelines for budget submissions

• Evaluate budget submissions

• Ensures that submissions reflect key government priorities

• Maintain on-going communication with other central government departments

• Make recommendations to MTEC, Budget Council and Minister’s Committee on the Budget (who in turn make recommendations to Cabinet and Extended Cabinet)

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Budgeting-the basics

Step 1: Determining the macroeconomic forecast

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Calendar year 2010 2011 2012 2013 2014 2015 2016

Actual Estimate ForecastPercentage change

Final household consumption 4.4 4.9 3.5 2.7 2.8 3.2 3.4

Final government consumption 4.4 4.3 4.0 2.5 2.2 2.3 2.4

Gross f ixed capital formation -2.1 4.2 4.4 3.2 4.2 5.3 6.0

Gross domestic expenditure 3.9 4.6 4.0 2.8 2.8 3.4 3.7

Exports 9.0 6.8 0.4 4.8 5.6 6.3 7.0

Imports 11.0 10.0 6.0 7.3 5.3 6.1 7.0

Real GDP growth 3.1 3.6 2.5 1.8 2.7 3.2 3.5

GDP inflation 7.7 5.9 4.5 6.1 6.4 6.2 5.9

GDP at current prices (R billion) 2 674 2 933 3 139 3 391 3 706 4 063 4 456

CPI inflation 4.3 5.0 5.6 5.7 6.2 5.9 5.5

Current account balance (% of GDP) -2.0 -2.3 -5.2 -6.1 -5.9 -5.8 -5.5


Step 2: Work out how much money comes into the National Revenue Fund

- Tax revenue

- Non-tax revenue (Provinces, entities, SSF’s, RDP)

• The revenue analysis working committee meets regularly to determine revenue projections for the Medium Term Expenditure Framework

• The committee is comprised of representatives from:• National Treasury• SARS• SARB

• The committee discusses and debates trends in tax revenue and form a consensus view on the revenue outlook for the new MTEF

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Step 3: Decide on expenditure envelopes and priorities

- Non-interest expenditure (majority)

- Interest expenditure

Determine fiscal policy Fiscal policy continues to be guided by the principles of countercyclicality, debt

sustainability and intergenerational fairness – expenditure ceiling

Over the medium term, government will balance continued support for economic recovery with fiscal consolidation

Composition of spending improves over the MTEF:

Capital is the fastest growing item of non-interest expenditure

Social wage (spending on health, education and social development) continues to grow in real terms

Expenditure on travel, catering, consultants and other administrative payments declines in real terms

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Step 4: Check expenditure against revenue to determine borrowing requirement

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Table 3.1 Consolidated fiscal framework, 2010/11 – 2016/17

2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17

R billion/percentage of GDP Outcome Estimate Medium-term estimates Revenue 762.9 842.3 909.3 1 010.5 1 099.2 1 201.3 1 324.7

27.7% 28.2% 28.4% 29.2% 29.0% 28.9% 29.1%

Non-interest expenditure 804.6 871.3 951.7 1 041.6 1 131.1 1 218.1 1 306.5 29.6% 29.4% 29.9% 30.2% 30.0% 29.5% 28.8%

Interest payments 75.3 81.7 93.5 107.7 121.2 133.5 145.1 2.7% 2.7% 2.9% 3.1% 3.2% 3.2% 3.2%

Expenditure 879.9 953.1 1 045.2 1 149.3 1 252.3 1 351.6 1 451.6 32.0% 32.0% 32.7% 33.2% 33.0% 32.6% 31.9%

Budget balance -117.1 -110.8 -135.9 -138.8 -153.1 -150.3 -126.9-4.3% -3.7% -4.3% -4.0% -4.0% -3.6% -2.8%

Is the debt sustainable

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The composition of spending is also crucial

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Table 3.4 Consolidated operating and capital accounts, 2010/11 – 2016/17

2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17

R billion Outcome Estimate Medium-term estimates Operating account

Current revenue 762.5 842.0 908.9 1 010.3 1 099.1 1 201.1 1 324.5

Current payments 756.4 838.7 920.7 1 011.1 1 093.8 1 176.5 1 254.2

Compensation 309.9 346.0 375.0 411.3 439.4 468.7 498.9

Goods and services 137.7 153.5 167.9 180.0 189.7 199.6 211.4

Interest payments 75.3 81.7 93.5 107.7 121.2 133.5 145.1

Current transfers and subsidies 233.5 257.5 284.4 312.2 343.5 374.7 398.7

Current balance 6.1 3.3 -11.8 -0.9 5.3 24.7 70.4

Percentage of GDP 0.2% 0.1% -0.4% -0.0% 0.1% 0.6% 1.5%

Capital account

Capital receipts 0.4 0.2 0.3 0.2 0.2 0.2 0.2

Capital payments 56.0 62.8 67.1 78.4 91.3 98.9 105.9

Capital transfers 45.2 48.5 52.4 55.9 60.6 66.9 73.2

Capital financing requirement1 -100.8 -111.1 -119.2 -134.0 -151.7 -165.6 -179.0

Percentage of GDP -3.7% -3.7% -3.7% -3.9% -4.0% -4.0% -3.9%

Financial transactions2 22.4 3.0 4.9 3.9 3.6 3.3 0.3

Contingency reserve – – – – 3.0 6.0 18.0

Budget balance -117.1 -110.8 -135.9 -138.8 -153.1 -150.3 -126.9

Percentage of GDP -4.3% -3.7% -4.3% -4.0% -4.0% -3.6% -2.8%

1. Includes payments for capital assets, receipts from the sale of capital assets and capital transfers2. Transactions in financial assets and liabilities



• Propose the Division of Revenue between the 3 spheres based on the above, and decisions made at a political level on priorities, after taking out the direct charges and the contingency reserve






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How is the money distributed?

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Direct Charges against National Revenue Fund

Contingency reserve

Available Expenditure: Division of Revenue

• National

• Provincial

• Local

Policy discussions at Cabinet, Budget Council, MinComBud

Direct Charges include:• Debt-servicing costs• Provincial equitable share• General fuel levy sharing with metros• Skills development levy• Other (mainly salaries of MPs, judges and magistrates)

44%

0.3%

55.7%

Spheres of government

• Constitution– Establishes three distinct but interrelated spheres of government, 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

• 1 national budget, 9 provincial budgets and almost 300 municipal budgets

• Executives decide on where to allocate resources

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Available Expenditure

Functions of the spheres

National Share

National government:• Delivers policing, foreign affairs,

defence, higher education

• Makes policy

• Sets priorities through legislation, norms and standards or political statements

Provincial Share Provinces:• Deliver school education, health,

social welfare

• Generally fund national priorities

Local Share Municipalities:• Deliver water, sanitation, refuse

removal

• Have more autonomy on what their resources are spent on 14

Medium Term Expenditure Guidelines

• Annual guidelines are prepared by the National Treasury

• Typically released to departments in June

• Apply to national and provincial departments and entities, including constitutional institutions

• Contain essential information for institutions’ preparation of expenditure estimates for the medium term expenditure framework by providing, inter alia:

– An indication of government’s priorities over the medium term– How to examine baselines and reprioritise expenditure– A discussion of performance against targets, including projected outputs – Details of all information to be provided when submitting expenditure estimates– Specific additional instructions to public entities and provincial departments– Guidance on budget submissions that relate to infrastructure, capital projects, donor funding, own sources of revenue

and co-funding

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How line ministries prepare their budgets

• National and provincial departments and entities run their own internal processes to prepare expenditure estimate submissions in line with the requirements outlined in the budget guidelines

• Typically the chief financial officer in each line department outlines a process whereby programme and subprogramme managers provide financial and non-financial information pertaining to the particular programme/ subprogramme that they are responsible for

• The chief financial officer’s office then considers all the inputs and utilises them to formulate expenditure estimates information for the institution as a whole

• Whilst undertaking this process, the line department typically interacts with National Treasury budget analysts and other departments in the function group to get advice and guidance

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Budget cycle key milestones

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Policy review Departmental planning Parliament

and budgetingApril

June

July

Aug

Sept

Oct

Review, evaluate and decide on new major policy proposals

Propose fiscal and budget framework, and division of resources

Executive/s consider fiscal framework and division of resources

Table Medium Term Budget Policy Statement

Departments prepare budgets, including detailed spending

plans for new proposals

Intergovernmental and technical forums

Sector and focused budget hearings

Division of Revenue Act passed

Appropriation Bill and Revenue Bills

passed

Budget cycle key milestones cont.

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Policy review Departmental planning Parliament

& budgetingNov

Dec

Jan

Feb

March

Cabinet approves new MTEF allocations

National Budget tabled (includes response to

BRRR)

Provincial budgets are tabled (14 days after

National budget is tabled)

Departments revise medium term plans and finalise budget inputs

Portfolio committees submit BRRR

______Adopt fiscal

framework, pass Money Bills

Adoption of fiscal framework

Departments revise medium term plans and finalise budget inputs

Strategic Plans tabled

Role-players in the budget process

• Role-players in the Executive– Medium Term Expenditure Committee (MTEC)– Minister’s Committee on the Budget– Cabinet– Extended Cabinet

• Departments

• Required by the Constitution and Intergovernmental Fiscal Relations Act:– Financial and Fiscal Commission (FFC)– Provincial governments - the Budget Council– Organised local government - the Budget Forum– Various intergovernmental forums exist at both the executive and official level to give effect to the constitutional

imperative for cooperative governance

• Relevant entities and donors

• Legislatures– Portfolio Committees, Finance Committees, Appropriations Committees– National Assembly– National Council of Provinces

• Provincial Legislatures

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Analysis of expenditure estimates for the MTEF

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• Financial and non-financial information which best describes the policy objectives and spending plans

• An assessment of whether the objectives and targets have been achieved in the past financial years

• Information from budget submissions should illustrate progress made in terms of policy priorities that departments are responsible for, and outputs that will be achieved if new proposed priorities are funded

• Other factors considered:– research on policy options for deliverables – funding in previous MTEF periods– evidence of under-spending and/or unwise spending– link of budget submission proposal to broad government priorities – proper plans and proper costing– appropriately aligned implementation and spending plans









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Functional group spending

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Table 6.1 Consolidated government expenditure by function, 2013/14 – 2016/172013/14 2014/15 2015/16 2016/17

R million

Revised estimate

Medium-term estimates

Defence, public order and safety 154 518 163 601 172 707 184 085 6.0%

Defence and state security 45 208 47 859 50 613 53 812 6.0%

Police services 74 047 78 132 82 537 88 005 5.9%

Law courts 16 514 17 888 18 762 20 187 6.9%

Prisons 18 749 19 722 20 796 22 081 5.6%

Economic infrastructure 84 657 92 805 101 235 105 032 7.5%

Communication 3 939 2 626 3 263 3 698 -2.1%

Fuel and energy 7 814 8 572 9 902 10 811 11.4%

Transport 72 904 81 607 88 070 90 523 7.5%

Economic services 47 929 50 010 52 463 55 536 5.0%

Education and related functions 240 538 253 848 274 480 293 268 6.8%

Pre-school, primary and secondary education

180 090 190 730 204 861 217 570 6.5%

Post-school sector 50 786 52 493 58 437 63 463 7.7%

Arts, sport, recreation and culture 9 662 10 625 11 182 12 235 8.2%

Employment and social security 47 890 57 329 64 078 69 297 13.1%

General public services 62 580 65 095 68 567 74 088 5.8%

Health 134 286 145 708 155 139 164 798 7.1%

Local government, housing and community amenities

127 222 142 889 155 526 163 539 8.7%

Housing development 29 229 34 767 37 577 40 916 11.9%Local government and community development

73 932 80 289 87 710 89 032 6.4%

Water supply 24 061 27 833 30 238 33 590 11.8%

Science and technology and environmental affairs

17 484 18 669 20 122 21 040 6.4%

Social protection 130 933 144 460 154 649 163 764 7.7%

Allocated expenditure 1 048 040 1 134 413 1 218 965 1 294 448 7.3%

Debt-service costs 101 256 114 901 126 647 139 201 11.2%

Contingency reserve – 3 000 6 000 18 000

Consolidated expenditure1 1 149 295 1 252 314 1 351 612 1 451 648 8.1%1. Consisting of national, provincial, social security funds and selected public entities Refer to Annexure W2 for a detailed list of entities included

Average annual MTEF

growth


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Thank you

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Business

Budget process government spending