COSATU submission on the

Medium Term Budget Policy Statement (MTBPS)

Presented to the joint sitting of the Portfolio and Select Committees on Finance, 4 November 1999

Table of Contents

  1. Introduction

  2. Summary of recommendations

  3. The budget process

  1. Macroeconomic policy

  1. Macroeconomic policy formulation
  2. Macroeconomic parameters
  3. Employment
  4. Inflation targeting
  5. International economic development
  1. Revenue
  1. Revenue parameters
  2. Composition of revenue
  3. Use of SASRIA funds

  1. Expenditure

    1 Trends in expenditure
    2 Defence expenditure
    3 The contingency reserve
    4 Infrastructure expenditure

  2. The public sector and public service
  1. Personnel expenditure
  2. Co-ordination of the budget and collective bargaining processes

Appendix 1: Trends in real expenditure allocations 1998/99 – 2002/03

  1. Introduction

COSATU welcomes the opportunity to make a submission to this joint sitting of the Portfolio and Select Committees on Finance on the Medium Term Budget Policy Statement (MTBPS). The MTBPS provides a useful platform for a review of fiscal policy in the light of new developments and according to an assessment of the efficacy of existing policy. It could have been an opportunity for government to modify its macroeconomic parameters and adjust its expenditure and revenue patterns along more appropriate lines for accelerating delivery.

On the surface the MTBPS presents an fairly optimistic picture of the economy for the next three years. Probing deeper, however, reveals unconvincing assumptions and a lack of flexibility in exploring policy alternatives. Key fiscal parameters, such as the debt:GDP and deficit:GDP ratios are planned to be even further reduced. While the MTBPS envisages some real (although small) increases in social spending, these are contingent on ambitious growth projections.

Our submission today will discuss the MTBPS in the context of the transformation of the budget process, will consider the macroeconomic environment and the macroeconomic parameters of the MTBPS, will examine on the revenue and expenditure sides of the MTBPS, and will look in particular at the public service.

  1. Summary of recommendations

    2. COSATU would like to table to following specific recommendations arising from or relating to the MTBPS:

  1. The budget process

    2. The Constitution (at s77) requires the enactment of legislation which will empower parliament to amend money bills, such as the budget, instead of the current system of voting to accept or reject them. Without such legislation the participation of parliament in respect of money bills is incomplete. Participation in parliamentary discussions after release of the budget, even if there is a process prior to finalisation of the budget, also becomes a futile exercise for organs of broader society, as no changes can be effected. It is for this reason that COSATU has not made formal submissions to parliamentary budget hearings for the last three years, although we have publicly released our analysis of and position on the budget every year.

    The ANC Elections Manifesto also contained a commitment to ensure that elected representatives in national, provincial and local spheres have the appropriate powers to shape budgets. COSATU calls on the Portfolio Committee on Finance to ensure the urgent tabling of an adequate Money Bills Amendment Procedure Bill. The Committee has in the past expressed support for such legislation, but were not satisfied with the draft tabled previously by the Department of Finance. The spirit and letter of the Constitution expressly states that an important aspect of South Africa’s democracy is the transformation of the highly secretive and centralised budgetary process inherited from the apartheid regime into a more open and participatory process.

    Over and above the legislative challenges of democratising the budget process, there is a need for increased participation – of parliament, NEDLAC, and society at large – to be involved in the budgetary process. It is in this context that we are making a submission on the MTBPS, notwithstanding the concerns raised above. We feel that meaningful input on the projections and intentions contained in the MTBPS is an important aspect of participatory budgeting. We hope that the Department of Finance will take submissions seriously and make the appropriate adjustments to their projections.

    COSATU welcomes the commitment to service delivery objectives, indicators and targets to assess service outputs when budgeting. The use of appropriate indicators of outcomes in a meaningful way would represent an improvement in transparency and accountability. The publication of the National Expenditure Survey, the Intergovernmental Fiscal Review and other planned publications are steps forward in this regard.

    The MTBPS outlines significant reforms that have taken place in the budget process. These reforms are not however part of an agreed process to transform the budget process. In fact, the piece meal announcement of a limited budget reform agenda by the Department of Finance, is constraining the meaningful participation of parliament, stakeholders and communities.

    COSATU looks forward to the tabling of the long-awaited Budget Reform White Paper, and hopes that this will spearhead the comprehensive democratisation of the budget process.

  1. Macroeconomic policy

    2. 4.1 Macroeconomic policy formulation

    It has been widely acknowledged that the process leading to the adoption of the GEAR strategy, and its presentation as being "non-negotiable", was fundamentally flawed. Problems centred around a lack of consultation and negotiation over an appropriate macro-economic framework, and a contrast was drawn with the open, participatory process which led to the adoption of the Reconstruction and Development Programme. Over and above the important differences about the contents of GEAR, the process problems contributed to a climate of uncertainty and mistrust.

    GEAR was intended to extend up to the year 2000. As we draw towards this time we will presumably be developing a new macroeconomic strategy for the coming period. COSATU hopes that the flawed procedure leading to the implementation of GEAR will be replaced by a more open and participatory process in formulating a more consensus-based macroeconomic policy framework.

    Although the MTBPS does not spell out the tenets of a macroeconomic policy for the forthcoming period, it does to set out many of the key parameters and targets. This preempts transparent discussions around the success of macroeconomic policy of the last few years – such an evaluation should surely inform future policies. COSATU is concerned about a situation wherein key stakeholders in the economy learn of government’s policy intentions through various budgetary publications.

    It is of course a competency – and in fact a responsibility – of government to project alternative future macroeconomic simulations, anticipating probable growth rates and the trends in other macroeconomic parameters and considering targets for other variables. What becomes problematic is where future projections are presented as definitive policy statements. COSATU hopes that, through the space afforded in these hearings and the committees’ deliberations, as well as forthcoming Cabinet discussions on the issues raised in the MTBPS, the projections of the MTBPS will not be cast in stone but will be adjusted according to agreed priorities and as a result of transparent discussions with stakeholders.

    4.2 Macroeconomic parameters

    4.2.1 Evaluating macroeconomic policy

    Macroeconomic policy can either aid or retard development to the extent that it maximises or constrains resources available to implement programmes. Gear’s privileging of fiscal rectitude among others, has produced a perverse planning paradigm. Developmental objectives have been supplanted by the subsidiary objective of reducing the government deficit. The level of the deficit is arbitrary and is not informed by South Africa’s development needs. Development plans have to fit within the deficit reduction programme rather than plans driving the budget.

    The GEAR strategy was premised on tight fiscal and monetary policy, in the hope that private investment would drive economic growth, create jobs, and lead to a more equitable income distribution. Unfortunately, what we have seen has been low growth, massive job losses, falling private sector investment, falling domestic savings, and a worsening current account deficit1. The fact that some departments have accelerated delivery, especially to the poor, under such difficult circumstances is particularly admirable. What is notable in comparing targets with figures achieved in different aspects of macroeconomic policy, is the particular combination of successes and failures. Targets such as deficit:GDP and revenue:GDP ratios have been stringently pursued, with performance in areas such as employment increasingly diverging from the targets.

    One of the lessons from the past few years however, is the fact that private capital has failed to take up the opportunities and responsibilities availed to it. Instead of leading job creation, private capital has led job shedding and capital disinvestment. Is it not the right time for a change in direction, for a greater emphasis on strengthening government’s role in accelerating delivery, crowding in private investment2, and transforming the economy?

    COSATU calls for a formal, open and participatory evaluation of the success of GEAR. This evaluation should feed into the development of new policy.

    4.2.2 The approach of the MTBPS

    The logic of the MTBPS is that conservative fiscal and monetary policy will lead to high economic growth, which will allow increasing spending even in the face of deficit reductions. Accomplishing this would be entirely contingent on achieving the high GDP growth rates projected – from 0.9% this year up to 3.5% in 2000, 3.4% in 2001, and 3.2% in 2002. The basis for these ambitious targets is not entirely clear, beyond some optimism related to global economic recovery and rising commodity prices.

    What will happen if these ambitious rates do not materialise? If the experience of the past few years is anything to go by, it will be the spending projections which are adjusted downward in order to broadly meet deficit and revenue targets. In raising these fears COSATU is not being defeatist or pessimistic – for the benefits of our members and South Africa at large we hope that there will indeed be higher growth, and in particular employment creating growth. However, basic and necessary spending should not just be contingent on such high growth coming to fruition.

    The logic of the MTBPS appears to be premised on a dramatic turnaround in investment trends. Gross fixed capital formation is expected to grow by 6.3% next year, after shrinking by a projected 5.7% this year (1999)! This is further called into question by the cuts in infrastructure spending discussed in section 6.4 of this submission.

    Insofar as the MTBPS does consider the possibility of more expansionary fiscal policy, the analysis is based on a simplistic model. A "lower deficit" scenario, with the deficit reductions as projected in the MTBPS and at 2.4% in subsequent years, is contrasted with a "higher deficit" scenario, in which the deficit is held at 3%. Both scenarios use the same growth projections of the MTBPS. The model shows, predictably, that the "lower deficit" scenario is associated with a falling of government debt relative to GDP. On the other hand, it is projected that under the "higher deficit" scenario the debt:GDP ratio is initially stable but later (on unclear assumptions) rises from 2005/6 to 2009/10.

    This "model" fails to conceptualise growth as being dynamically related to borrowing and spending – it does not consider the possibilities of increased spending for economic stimulation, which can ultimately reduce the debt:GDP ratio more effectively than short-sighted fiscal austerity. For example, by year 2002/03 the "higher deficit" scenario (although we would hardly call 3% a high deficit!) would release an additional R6.2 billion for spending over the "lower deficit" scenario.

    Interestingly, a convincing motivation for debt financing for capital expenditure was well articulated in the Intergovernmental Fiscal Review:

    Borrowing enables a government to finance the initial cost immediately but to budget repayment over time as benefits from the investment are derived. Spreading the burden of the investment ensures that current taxpayers do not fund the entire cost of a project that will render benefits to future generations. Debt financing also allows a government to undertake more projects, and sooner, than would have been possible from tax revenue alone.3

    It is also important to consider the contribution of other factors to debt service costs. We support the acknowledgement in the MTBPS that high interest rates contributed to debt servicing costs. The effects of the other contributing factor mentioned, "financial uncertainty", were in our view exacerbated by exchange control liberalisation.

    The MTBPS asserts that public enterprise restructuring over the next three years will contribute further to reducing government debt and improving the transparency and effectiveness of government entities. COSATU’s approach to state asset restructuring and our concerns with privatisation in particular have been articulated in other forums, notably through the National Framework Agreement (NFA) process. These concerns have included lower delivery standards especially for the poor, job losses, and a diminished ability of the state to steer economic development.

    In the specific context of the fiscal parameters under discussion in the MTBPS, we feel that it is short-sighted to celebrate debt reduction achieved through the selling off of state assets. The fact that private investors are willing to pay substantial amounts of money for shares in state assets indicates their confidence in the future revenue generating capacity of these assets. By settling for some reduction in our (moderate) debt in the current period, we are losing out on these future opportunities. COSATU is concerned that the intense focus on debt and deficit reduction is encouraging such short-sighted policies.

    In our submission on the recently released Intergovernmental Fiscal Review ("the Review"), COSATU critiqued a logic which elevates cost efficiency to an overarching principle, judging the fiscal success of provinces as being directly proportional to money saved. This logic is premised on the notion that squeezing resources will automatically lead to efficient governance, with the effects on delivery either deemed irrelevant, or assumed to flow from this greater "efficiency". We thus found in the Review a bizarre scenario of provinces being congratulated for not spending their full allocations while in the very same provinces healthcare is in a serious condition, education is in a state of "crisis"4, and huge backlogs remain in almost all spheres of delivery. Our reading of the MTBPS reveals a similar logic, which prioritises the meeting – or even surpassing – of abstract fiscal targets above the meeting of basic needs.

    COSATU recognises that there is considerable inefficiency at various levels of the public sector, and that South Africa can ill-afford wastage of badly needed resources. In this light we strongly support any attempt to stamp out corruption, correct misallocation of personnel and other resources, and encourage efficient spending of public funds. The benchmark for such efficiency should be outcomes: to what extent does every Rand of public expenditure assist in the short, medium and long terms in advancing the goals of the RDP?

    Where provincial deficits have been reduced or turned into surpluses, or where departments have not spent all their allocated funds, the source of this needs to be interrogated: is it due to greater efficiency in using given resources to meet basic needs? Or is it due to reduced service delivery to the poor, either through poor spending capacity or through a deliberate cost-cutting approach? There is little cause for celebrating surpluses if they arise through either of the latter. There is insufficient information available on the real reasons for reductions in deficits, for deficits being transformed into surpluses, or for departmental "savings".

    We are concerned about the setting of inappropriate goals and "incentives" for both elected representatives and civil servants. A situation should be avoided where departments or provincial governments either postpone or scale down delivery in pursuit of balancing their books or even reporting a surplus or saving. The focus should rather shift to outcomes-based motivations and targets towards which departments and provinces should strive.

    For COSATU the issue which has been posed by some commentators as to whether a budget surplus is achievable5 is the wrong question to pose. Given the huge development challenges facing South Africa, it would indeed be strange if we do not maximise the available resources. COSATU is by no means advocating irresponsible or uncontrolled expenditure – there will always be limits to spending. We do not, however, agree with the Department of Finance’s assessment of where these limits should lie.

    This also raises the question of accountability. COSATU is concerned about the danger of elevating the Department of Finance to a "super-department" to which other national departments as well as provinces must answer, with the effective power to veto expenditure which may interfere with the meeting of arbitrary targets. Departments and provinces need to be accountable to the citizens of South Africa. Whilst we acknowledge the important role of the Department of Finance in terms of ensuring overall fiscal prudence, this becomes problematic if it amounts to a veto power over developmental plans.

    The MTBPS contains a commitment to a more equal distribution of economic opportunities and income. COSATU welcomes this commitment and looks forward to the tabling of concrete proposals in this regard.

    4.2.3 Towards alternative parameters

    The Declaration of the Presidential Jobs Summit, crafted on the basis of consensus between government, business, labour, and the community constituency, placed an emphasis on macroeconomic policy being appropriate. This appropriateness was conceptualised in terms of the elimination of poverty, reduction of inequality and a redistribution of resources; an increase in per capita GDP through higher levels of investment, growth and development; and the maximum potential net job creation within an employment generating growth path. COSATU believes that this consensus should feed into future macroeconomic policy, and we would have hoped that the MTBPS would have reflected such priorities.

    Given the difficulties in projecting precise growth rates for the next few years, particularly in the light of an unpredictable global economy, some certainty on future expenditure is required. It is for this reason that COSATU has proposed flexible bands for deficits and revenue. Spending should not just be the "soft" part of the equation, adjusted according to fixed deficit:GDP and revenue:GDP targets. Setting future expenditure targets and adjusting revenue and deficits within flexible annual bands would provide some delivery certainty.

    4.3 Employment

    We are concerned that greater emphasis is not placed on employment retention and creation in the MTBPS. Given the unemployment crisis facing South Africa, COSATU believes that all policy needs to be evaluated in terms of its employment effects. While job creation is mentioned in the document, this is incidental rather than being the key focus. To say that "labour absorption in the economy has been weak since 1990, and the trend in formal employment since 1994 has not improved"6, shows little appreciation of the crisis state of unemployment in South Africa and the daily hardships millions of South Africans endure as a result.

    The section of the MTBPS on challenges for the economy (p29-30) does not even mention employment retention and creation. Nor is it specifically mentioned in the list of social and economic priorities (p45-46). The MTBPS contains no projections of employment over the years it covers. In our view, however, the projections and intentions on other aspects of macroeconomic policy contained in the Review are unlikely to improve the employment situation and COSATU fears a further worsening, unless there is a radical rethink of our economic policies.

    4.4 Inflation targeting

    We note the commitment by the Department of Finance to announce an explicit target for inflation next year, and that it is apparently taken as given that this will be lower than current rates. We also note the projections for falling headline inflation from 5.5% in 1999 to 4.8% in 2002, and for core inflation from 7.9% in 1999 to 5% in 2002. Presumably these projections represent some indication of intended targets for inflation.

    COSATU is concerned about the prioritisation of inflation in particular for a targeting mechanism, rather than other economic variables – in particular employment and interest rates. Furthermore, we are opposed to the further tightening of monetary policy associated with the planned reductions in inflation. Several commitments have been made, notably by the Governor of the Reserve Bank Mr. Tito Mboweni, to extensive consultations with labour and business prior to the implementation of any inflation targeting. We are surprised that decisions have apparently already been taken by the Department of Finance on the levels of inflation targeting, and fear that these will continue to reflect the pursuit of low inflation at the expense of growth and employment.

    4.5 International economic development

    COSATU welcomes the analysis from Minister Manuel of the need for co-operation in the global economy, with a particular focus on developing countries. The Minister mentions inter alia financial regulation and oversight, debt relief for poor countries, a fairer international trading environment. He also speaks of the promotion of a world in which the gaps between rich and poor, and powerful and weak nations are narrowed. We look forward to the tabling of concrete proposals for taking these sentiments forward. Some of the above issues are on the agenda of the NEDLAC Public Finance and Monetary Chamber and Labour is eager to pursue discussions on them.

  2. Revenue

    3. 5.1 Revenue parameters

    COSATU welcomes the improvements in revenue collection since 1994, and feel that there is still substantial room for further gains – particularly in eliminating opportunities for tax avoidance and evasion in the corporate sector and upper income brackets. It is heartening that, despite the poor state of the economy, revenue collections have increased by 8.2% for the first six months of this year over the corresponding period 1998/99 and an additional R2.1 billion in national budget revenue is projected for the 1999/00 year7.

    One question which arises from this improved revenue collection is what these extra resources are used for. This goes to the heart of the fiscal choices faced by us as South Africa. Do we make use of the extra revenue, or do we satisfy ourselves with moderate levels of revenue and reduce tax rates accordingly? If we decide to make use of the extra resources, do we direct them towards debt reduction or expenditure? If they are to be spent, what are our expenditure priorities?

    COSATU does not agree with the choices which are presented in the MTBPS. Additional revenue raised – which was in any event due to the state – should not be used as a motivation for reducing tax rates, particularly not corporate tax rates. Furthermore, increases in revenue should be channeled towards increased spending rather than to debt reduction.

    While revenue collection is obviously strongly influenced by GDP, it is important that there is some certainty as to what revenue can be expected in order to ensure adequate resources for delivery. This can be accommodated by more flexibility in the revenue:GDP ratio, which should be revised accordingly. This approach is part of the framework outlined in section 4.2.3 of this submission: predictable targets for expenditure and flexible bands for deficit:GDP and revenue:GDP ratios.

    Government is unnecessarily undermining its delivery capacity by putting a ceiling on the revenue:GDP ratio. COSATU has consistently critiqued the 25% ratio set out in the GEAR strategy, both in terms of its level and in terms of the principle of a fixed ratio. We as a nation are "selling ourselves short" in terms of our capacity to meet our massive development challenges.

    South Africa’s revenue:GDP ratio is very low as compared to developed countries and low to moderate as compared to developing countries. South Africa’s ratio is about four percentage points lower than the average for countries with similar income levels. Econometric studies that control for individual country characteristics have found South Africa’s rate to be significantly less than that which would be predicted given the country’s economic profile8. The recent upward revisions of GDP measurements would further lower reduce South Africa’s revenue:GDP ratio. Tax effort analysis suggests that South Africa could mobilise an additional twenty-five billion Rand per year without undermining international competitiveness9.

    In this light COSATU is amazed that further reductions in the revenue:GDP ratio are being planned in the MTBPS, falling to 23.5% in 2002/3. This will further restrict the resources available for reconstruction and development. The gains made through more efficient revenue collection are being thrown away in the pursuit of abstract targets, rather been channeled towards accelerated delivery. We also note that the revenue figures reflected in the MTBPS include income from demutualisation and other levies and donor funded expenditure, without which revenue amounts and ratios would be even lower. The revenue projected in the MTBPS will be insufficient to meet the backlogs and social delivery let alone the new needs which are constantly arising.

    5.2 Composition of revenue

    The MTBPS does not appear to give an indication as to the future composition of revenue. Nevertheless, COSATU is concerned that the additional R4.5 billion in revenue in 1998/99 was derived mainly from higher taxes on income10. The 1990’s have seen a continuation of the trend of shifting the tax burden away from companies and onto individuals. Until 1980 revenue from gold mines and other companies was one and a half times that from individuals. This contrasts with the current situation of individuals paying four times as much as gold mines and other companies! Whilst some of this shift can be explained in terms of falling revenue from gold mines in particular, it has also been caused by falling corporate tax rates and possibilities for corporate tax avoidance.

    Individuals, through income tax and consumption taxes, now bear two thirds of the total tax burden. The tax system has become increasingly regressive and companies have contributed less and less to the fiscus. COSATU would be opposed to the composition of tax revenue falling even more heavily on individuals. While we believe that the upper income brackets need to be more heavily taxed, the overall tax burden needs to shift onto the corporate sector. This could fund an increase in the tax:GDP ratio, freeing up more resources for the acceleration of transformation11.

    We propose that in future the MTBPS should also include detailed revenue proposals to enable input from parliament and broader society of this aspect of the budget as well.

    5.3 Use of SASRIA funds

    In Labour’s proposals to last year’s Presidential Jobs Summit we argued that the SA Special Risks Association (SASRIA) funds should be productively invested in job creating projects and programmes. We were disappointed to hear that the R7.1 billion SASRIA funds will be used to reduce debt instead of to meet social needs and create employment. This is indicative of the elevation of deficit reduction above social delivery.

  3. Expenditure

    4. 6.1 Trends in expenditure

    We are disappointed that the MTBPS’s prioritisation of fiscal policy goals (p34) does not consider increasing spending to meet social backlogs and boost employment – only the reprioritisation of expenditure is contemplated. Instead, the focus is on fiscal austerity – including moderating the level of government consumption spending relative to GDP, reducing the budget deficit, and lowering the burden of tax on the economy.

    The MTBPS does not give real figures for expenditure in various categories for the period it covers. The following table indicates the trends in various spending categories, in real terms, for the forthcoming years. Appendix 1 indicates changes over this period in nominal terms and in real terms using both "headline" (Consumer Price Index) and core projected inflation rates. As the MTBPS notes (p56), the classification of expenditure by type of service which it provides does not fully correspond with the more detailed functional breakdown that is published in the Budget Review and in the official general government statistics. This discrepancy does somewhat limit comprehensive comparisons and trend analysis. It also means it is impossible to analyse spending on certain excluded functions, such as housing and community development. COSATU helps that in future MTBPS’s maximum compatibility with related publications is ensured.

    Table 1: Trends in real expenditure allocations, 1998/99 – 2002/03

     

    98/99-99/00

    99/00-00/01

    00/01-01/02

    01/02-02/03
    Headline CPI Inflation12 5.5% 5.2% 5.1% 4.8%
    SOCIAL SERVICES

    Education
    Health
    Welfare

     

    -0.38%
    3.08%
    2.15%

     

    2.43%
    0.73%
    0.89%

     

    0.61%
    0.87%
    0.64%

    		 

    0.97%
    1.89%
    0.63%

    PROTECTION SERVICES

    Defense and Intelligence
    Integrated Justice System

    		  

    -5.5%
    0.72%

    		  

    22.87%
    4.71%

    		  

    5.17%
    0.23%

    		  

    2.65%
    -0.13%

    ECONOMIC SERVICES

    		 -4.62% 0.06% 3.23% 2.89%

    INFRASTRUCTURE

    		 -17.26% -8.53% 0.81% 0.32%

    ADMINISTRATION

    		 45.20% 45.20% -0.93% 0.00%

    Note: The data for 1998/99 refers to actual outcomes, 1999/00 refers to the revised projections, and figures for 2000/01 – 2002/03 are the medium term estimates.
    Source: Medium Term Budget Policy Statement 1999, p57

    The above data call into question the characterisation in the MTBPS of social spending being "well above" projections for inflation. In the light of the huge socio-economic backlogs and apartheid legacy facing South Africa, real increases in social spending which are in most cases below 1% are likely to be inadequate. Spending on welfare and social grants is the lowest for the period as a whole compared to other items of social spending (an average nominal annual increase of 5.8% as compared to 6.2% for health care and 6.4% for education. Given the current low uptake of grants and the anticipated increases in uptake, the welfare budget will be under severe strain.

    It should be borne in mind that if expenditure changes were viewed on a per capita basis, apparent increases would probably be negated in the light of population growth. Furthermore, should inflation rise above the projections made in the MTBPS, any gains reflected in the above table would be eroded and any cuts would be worsened.

    Defence and intelligence is the fastest growing spending item, and is discussed in more detail in the subsequent section of this submission. Spending on Economic Services is cut sharply from 1998/99 – 1999/2000, before stabilising and growing somewhat thereafter. This is a crucial item of spending, as it includes some aspects of capital expenditure as well as funding many of the measures necessary for an active industrial policy. As is clear from the above table, infrastructural spending is slashed in the first two years while remaining approximately stable (marginal real growth) in the subsequent two years. Very large proportional real growth is envisaged in spending in administration up to 2000/01, although this remains the smallest item of expenditure in absolute terms.

    COSATU welcomes the specific allocations to job creation and poverty alleviation. Over and above these specific grants, we would refer back to the RDP paradigm of an integrated approach to economic transformation. All departmental allocations as well as the allocations between departments and the overall fiscal parameters need to be geared towards employment creation and improvements in the standard of living of our people.

    6.2 Defence expenditure

    Specific comment is warranted on defence and intelligence expenditure, which is the planned to be the fastest growing spending category over the next three years. According to MTBPS figures, this expenditure is set to rise at an annual average rate of 14.9% from this fiscal year until 2002/3 – at least double the growth rate of education, health, and welfare. The available expenditure projections include supplementary allocations to the Defence vote of R2.8 billion, R3.8 billion and R4.5 billion over the next three years to fund the new arms procurement contracts.

    A number of concerns have been articulated by civil society about the Arms Procurement Deal and the extent to which it reflects South Africa’s developmental priorities. A further point which this raises for us is the fact that resources can be found where there is a will to do so. If expenditure plans could have been adjusted to accommodate these purchases, why could there not be further adjustments to fund social backlogs? We are also concerned about the effect of increased military spending, in the context of overall fiscal austerity, squeezing spending in other areas.

    According to the MTBPS, increasing defence spending is responsible for the increasing proportion of spending going to the national share of government (p53), at the expense of the provincial sphere. This is of concern given the fact that provincial resources are already under strain and that provinces are responsible for most social spending. In terms of the division of spending by economic type, the MTBPS also notes that it is the envisaged transfer to the Special Defence Account for the purchase of "strategic military equipment" which is responsible for the increase in current transfer payments over the medium term (p54). Current transfer payments increase at a much higher rate than does expenditure on personnel. If anything is to be blamed for putting pressure on spending on goods and supplies (the remaining item of current expenditure) or on capital expenditure, it should thus be military rather than personnel spending.

    6.3 The contingency reserve

    The MTBPS discusses the rationale for a contingency reserve, which includes ensuring that government can adjust to adverse macroeconomic developments or make funds available for natural or other disasters. The MTBPS also sets out intentions for future levels of the reserve: R2 billion in the 2000/01 Budget, doubling to R4 billion in 2001/02 and doubling again to R8 billion in 2002/03.

    COSATU recognises that, as part of responsible fiscal planning in an uncertain world, it is sensible to earmark some resources for unexpected negative developments or events. However, we would be concerned about a situation wherein an increasing portion of "expenditure" (3% in 2002/03) is effectively "saved" in case of unfavourable conditions. This can give an impression of expenditure being higher than its actual levels in any given year.

    For example, if the contingency reserve is not classified as part of expenditure, the deficit falls drastically to 1.63% of GDP! While COSATU is by no means suggesting that there should be no contingency reserve, the prioritisation of spending needs further interrogation and furthermore such allocations need to be unpacked when analysing the trends of macroeconomic parameters. Ultimately, the best buffer against uncertain economic conditions at least, is a robust domestic economy with suitable protection against destabilising international capital movements13.

    Elsewhere in the review (p56) it is suggested that provincial finance reserves and the contingency reserve on the national budget are likely in part to be allocated to services. COSATU would certainly support such a move.

    6.4 Infrastructure expenditure

    Adequate government spending on infrastructural development is crucial not only for the meeting of current basic needs but also for long term economic development. Capital expenditure can have significant positive "multiplier effects". It has the potential to stimulate local demand and to boost local growth through realising forward and backward linkages to a host of other sectors. Public capital expenditure can "crowd in" private expenditure by providing suitable infrastructure and boosting economic activity. It can also be used as leverage by the state for shaping economies in targeted areas and sectors. Capital spending, properly managed, is thus a true investment in building a prosperous economy.

    A failure to maintain and upgrade infrastructure in the current period, as reflected in the MTBPS, will also be more costly in the long run. For example, once roads reach a certain point of degradation the costs of repairing them rise exponentially as compared to what the initial cost of maintaining them could have been.

    The spending on household infrastructure is a point of concern. The current basic standards for water, houses, sanitation and other services are not conducive to economic growth and development. For example, the provision of 25 l of water per person per day might be sufficient for survival, but not for irrigation. Another example is the provision of houses on the periphery of townships. This practice continues to relegate townships as "dormitory areas", and does little to attract investment into these areas.

    Increasing capital expenditure is/was one of the key pillars of the GEAR strategy, but this was not realised in actual budget allocations. This has been a function of the cuts in expenditure driven by the tight deficit:GDP targets.

    An example of this is expenditure on transport, roads, and public works - so crucial for integrated economic development. 1996 to 1999 saw a 24% fall in real expenditure on these items across all provinces. Of particular concern is the fact that in provinces such as the Eastern Cape and Northern Province, which are most in need of development, the cuts were especially high – by 40% and 31% respectively14.

    Looking at aggregate capital expenditure as a proportion of provincial budgets, this has almost halved from 1996/7 to 1999/00, falling from 8.67% to 4.65%15. Although this has fallen for every one of the provinces, the cuts tend to be sharpest in provinces most in need of economic development. Although conditional grants have propped up capital expenditure to a limited extent, planned capital expenditure within the equitable shares is set to fall further over the medium term. Conditional grants mostly protect capital spending within the social service budgets, and not capital spending within areas such as transport or agriculture.

    We note the commitment in President Mbeki’s opening speech to Parliament that improvements which have been made in the deficit and debt ratios will allow for increased public sector capital expenditure. We also note the commitments made in the MTBPS to rising capital expenditure. Our concern is that the figures projected in the MTBPS will make it difficult to meet these commitments. As indicated in the above section, infrastructure spending faces the heaviest cuts of all categories of expenditure, and later stabilises only to grow by less than 1%.

    The major new infrastructural projects mentioned in the MTBPS are two maximum security prisons, in Bloemfontein and Louis Trichardt. Necessary as these may be, this is not infrastructural development geared directly at improved service delivery.

    Public Private Partnerships

    The use of Public Private Partnerships (PPP’s) in the delivery of services is a subject of intense debate and discussion. The MTBPS notes that where these have been implemented so far in South Africa, results have been mixed. COSATU recognises that the private sector certainly does have an important role in investment and in maximising delivery. We would be concerned, however, if PPP’s are resorted to as "top-up" funding where insufficient allocations are made. PPP’s can never substitute for integrated development planning with strong public capital expenditure.

    The establishment of an interdepartmental task team in government to explore these issues warrants concern. The brief, objectives, and outcomes of this process have not been discussed with labour. We call on the government to develop a clear and more transparent approach which incorporates negotiations with labour.

  4. The public sector and public service

    5. 7.1 Personnel expenditure

    An argument has been made by some commentators that it is the public sector wage bill, or current expenditure more broadly, which is responsible for "squeezing" capital spending. This premise leads to a policy prescription of containing the public sector wage bill in order to "free up resources" for capital expenditure. This is an argument which COSATU would like to tackle head on.

    Provinces are often faced with the difficult situation of having fixed allocations from national government, little flexibility in raising their own revenue, and much of their current expenditure fixed at a national level. In their attempts to "balance the books", they may well be forced to effect an adjustment in the budget items which are the most "flexible". This leads to the perverse squeezing of capital expenditure, not by current expenditure per se but by the particular combination of fixed and variable items of income and expenditure. It is thus disingenuous to single out personnel expenditure as the "culprit" to be blamed for insufficient capital expenditure and non-personnel current expenditure.

    The education and health sectors in particular are highly labour intensive, and as such personnel expenditure is not purely a cost but rather an investment. Furthermore, the building of strong public sector institutions will require an adequate mix of motivated staff, who have the required tools to teach or provide health care. The so-called "trade-off" between current and capital expenditure thus really skirts the question of how do we build a better public service.

    As COSATU has pointed out in past, schools cannot teach and clinics cannot heal people. It is the public servants themselves who are at the frontline of delivery. For example, the Presidential Education Initiative Report identifies one of the central problems in schools as being excessively high pupil:teacher ratio’s, and that this problem is worst in black schools in poor communities. This situation would be exacerbated by trying to reduce education personnel costs.

    Increases in expenditure on personnel have in fact been modest, although personnel expenditure has indeed increased somewhat as a proportion of the total budget. For example, the increase in improvement of conditions of service last year (as an outcome of the negotiations process) has been blamed for putting pressure on provincial spending – despite the fact that the increase only amounts to 0.25% of the budget!

    One of the causes of personnel spending increasing as a proportion of the total budget has been the addressing of past imbalances within the public service, in particular racial inequities in conditions of service. For example, money had to spent to provide for pensions for civil servants in the former homelands. This is government policy, and is a necessary aspect of dealing with the apartheid legacy. The squeeze on the budget as a whole also contributes to the apparent proportional rise in personnel expenditure relative to other items.

    The "right size" for the public service is a dynamic concept which needs to be outcome based - it needs to be assessed in terms of state successes and failures in sectors that can be attributed to personnel size and functions. An appropriate conception of "rightsizing" was captured in the April 1996 agreement between unions and the state, which also reflected the approaches of the RDP and the White Paper on Public Service Transformation. The definition of rightsizing in the agreement read as follows:

    A concerted effort to determine on a programme by programme basis the minimum number of staff which would be adequate to deliver a particular programme, having regard to declared policy and priorities.

    Given that the public service as a whole has decreased by 13.3% since 199416, and that massive backlogs remain, it is extremely doubtful whether much further space for downsizing remains17. This is confirmed by the recent audit commissioned by government, which even indicated the need for additional personnel in certain areas. The matching of social needs with personnel skills remains the only scientific basis for determining the "right size" of the public service.

    7.2 Co-ordination of the budget and collective bargaining processes

    The inadequate alignment of budgeting and bargaining systems was one of the fundamental sources of the current dispute in the public service. The inadequacy was clearly seen, when the ‘final’ offer from the state was announced in parliament during the 1999/2000 budget speech, rather than in the collective bargaining chamber. This announcement had significant implications for labour relations not only for the public service, but also for all workplaces in South Africa. Firstly, one of the purposes of collective bargaining is to ensure that employers do not take unilateral decisions and that negotiations are conducted in good faith. The budget announcement however rendered the collective bargaining systems marginal and irrelevant. This strained relationships between the state and public sector unions.

    Secondly, the announcement attempted to render organised labour as a spectator on issues that directly affected their members. Differently stated, the public sector unions did not have the space to negotiate, in good faith, with the employer. The employer in using parliament to announce its final offer, closed the space for meaningful dialogue and negotiations as envisaged in the Labour Relations Act.

    Needless to say, had a more sensible alignment between the budget and collective bargaining process been agreed to, better labour relations would be possible. Specifically, we propose the completion of the collective bargaining cycle before the draft budget is submitted to Cabinet. This relates to the broader question of the relationship between plans, budgets, and personnel. COSATU believes in a logical sequencing of identifying needs, drawing up plans to meet these needs, assessing the personnel required to implement the plans, and calculating the budget needed to finance this personnel and the plans in their entirety – cognisant of course of responsible spending limits.

    COSATU is concerned that, should the budget and public service collective bargaining processes not be properly co-ordinated, problems will again arise in the Public Service Co-ordinating Bargaining Council (PSCBC) for the year 2000/01. Whilst recognising that the MTEF process requires some calculation of future wage bill increases, these projections should inform rather than confine the bargaining process. Similarly, discussions with public service unions around remuneration policy should feed into the MTBPS.

    The MTBPS states that the preliminary projections provide for personnel expenditure growth of about 5.4% a year, recognising that a new remuneration policy will be discussed in due course in the PSCBC. If this is an acknowledgement that this projection is subject to the negotiation of a remuneration policy, this principle is to be welcomed (without us commenting here on the figure itself).

    The public sector unions affiliated to COSATU have consistently called for such a policy. The remuneration policy will provide a sustainable framework for negotiating salary and other benefits. It is also central to realizing the goal of accelerated change in the context of the public service. We are, nevertheless, concerned that the MTBPS undermines the PSCBC agreement on criteria for the new remuneration policy, and strips the remuneration policy of its transformatory context.

    We note the reflection in the MTBPS of the additional R250 million for additional improvements of service for the public service. This is provided through the Adjustments Estimate for 1999/00, allocated as "unforeseen and unavoidable expenditure". A question which arises for COSATU and our public sector affiliates is around the "rigidity" of resources available for wage increases in the ongoing public service dispute. If there was sufficient flexibility to allocate this additional R250 million, and a total extra R2.2 billion unbudgeted expenditure for various functions, what is the obstacle to further allocations?



Appendix 1: Trends in real expenditure allocations 1998/99 – 2002/03

 

NOMINAL CHANGE

REAL CHANGE

(using headline inflation figures)

Headline Inflation:

REAL CHANGE

(using core inflation figures)

Core Inflation:
          5.50% 5.20% 5.10% 4.80% 7.90% 6.90% 5.05% 5.00%
 

98/99
-99/00

99/00
-00/01

00/01
-01/02

01/02
-02/03

98/99
-99/00

99/00
-00/01

00/01
-01/02

01/02
-02/03

98/99
-99/00

99/00
-00/01

00/01
-01/02

01/02
-02/03
SOCIAL SERVICES
Education

 

5.12%

  

7.63%

  

5.71%

 

5.77%

 

-0.38%

 

2.43%

 

0.61%

 

0.97%

 

-2.78%

 

0.73%

 

0.21%

 

0.77%

Health

8.58%

5.93%

5.97%

6.69%

3.08%

0.73%

0.87%

1.89%

0.68%

-0.97%

0.47%

1.69%

Welfare

7.65%

6.09%

5.74%

5.43%

2.15%

0.89%

0.64%

0.63%

-0.25%

0.81%

0.24%

0.43%
PROTECTION SERVICES
Defense and Intelligence

 

0.00%

 

28.07%

 

10.27%

 

7.45%

 

-5.50%

 

22.87%

 

5.17%

 

2.65%

 

-7.90%

 

21.17%

 

4.77%

 

2.45%

Integrated Justice System

 6.22%

9.91%

5.33%

4.67%

0.72%

4.71%

0.23%

-0.13%

-1.68%

3.01%

-0.17%

-0.33%
ECONOMIC SERVICES

0.88%

5.26%

8.33%

7.69%

-4.62%

0.06%

3.23%

2.89%

-7.02%

-1.64%

2.83%

2.69%
INFRASTRUCTURE

-11.76%

-3.33%

5.91%

5.12%

-17.26%

-8.53%

0.81%

0.32%

-19.66%

-10.23%

0.41%

0.12%
ADMINISTRATION

50.70%

12.15%

4.17%

4.80%

45.20%

6.95%

-0.93%

0.00%

42.80%

5.25%

-1.33%

-0.20%

Footnotes:

  1. "Data from the National Institute for Economic Policy.

  2. By "crowding in private investment" we refer to a situation where government investment promotes private investment in a complementary manner, in contrast to the neo-liberal approach which argues that government spending can constrain private investment. For example, government investment in infrastructure and service delivery can create more conducive conditions for business growth.

  3. Intergovernmental Fiscal Review p2.9.

  4. In the words of the Minister of Education.

  5. J. Katzenellonbogen "A budget surplus is within reach" Business Day 1 November 1999.

  6. See the section on labour market developments in the MTBPS, p27.

  7. Medium Term Budget Policy Statement 1999 p41

  8. M. Samson (1999) "Poverty-eradicating job creation".

  9. M. Samson (1996) "Re-evaluating South Africa's fiscal constraints on transformation".

  10. The only year for which this information is given.

  11. COSATU will shortly be tabling detailed proposals in NEDLAC's Public Finance and Monetary Chamber on the restructuring of the tax system, including proposals on multiple VAT rating, VAT zero-rating, luxury taxation, corporate tax, and capital gains tax.

  12. These are the inflation rates projected in the MTBPS.

  13. Labour will shortly be tabling a research paper and policy proposals on the regulation of international capital flows in the NEDLAC Public Finance and Monetary Chamber.

  14. IDASA (1999) "A Review of Provincial Budgets 1996/7 - 1999/000"

  15. ibid.

  16. Department of Public Service and Administration (1998) "Exchequer Report"

  17. In one example of the police service, the number of policemen and women has fallen by 8.6% over the period 1995 to 1998. (Source: Department of Finance (1998) "MTEF Integrated Justice Sector Report")

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