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Towards a People's BudgetCOSATU Comment on the Medium Term Budget Policy StatementReleased 1 November 2000 |
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Towards a People's BudgetCOSATU Comment on the Medium Term Budget Policy StatementReleased 1 November 2000 |
These are the preliminary comments of SANGOCO, the SACC and COSATU on the Medium Term Budget Policy Statement released on Monday. We first briefly look at expenditure patterns, then at revenue, and then contrast the approach of the People’s Budget.
Launch of the People's Budget
The People’s Budget, launched today, November 1 2000, is an initiative of SANGOCO, the SACC and COSATU. This campaign will produce a progressive People’s Budget framework, together with an appropriate macro-economic strategy. That will form the basis for a broader discussion of and participation in the budget process, as the basis for ensuring that the budget increasingly reflects social needs.
The People’s Budget has identified the current macroeconomic policy as a major obstacle to development. Under that approach, government activities are seen as a burden on the economy. Government expenditure is therefore shaped, not by social and economic needs, but rather by restrictive and ultimately arbitrary macro-economic ratios.
This strategy ignores the fact that apartheid left enormous backlogs in skills and social infrastructure. In these circumstances, higher social spending – on education, health, welfare, safety and security and infrastructure – is a necessary precondition for development and rapid economic growth. In short, we need to take the returns on social spending more consistently into account when determining government spending.
An inappropriately restrictive fiscal policy survives essentially because debates and policy processes around the budget remain narrow. Even Parliament has only a limited role in affecting the budget, since it cannot amend money bills. This continued restriction is unconstitutional.
A more democratic discussion on the budget must start with broad capacity building, to enable our constituents and other members of civil society to understand budget processes and engage with them. On that basis, we will push for a more open and consultative process for drawing up budgets.
To achieve these aims, the People’s Budget will develop a progressive budget framework on an annual basis, within an appropriate macroeconomic strategy. To raise public awareness of budget issues and provide routes for engagement, it will conduct educational campaigns, workshops, people’s forums and mass action. These activities will be used to engage with key fiscal events, including the MTBPS and the annual budget.
Response to the MTBPS
The Medium-Term Budget Policy Statement (MTBPS) released on Monday, reverses the trend toward real cuts in budgets, but remains within the fiscal paradigm established with the GEAR. As a result, although the 2000 MTBPS proposes an increase in spending in real terms – a welcome reversal of the pattern of the past three years – it makes the increase entirely contingent on rapid growth in the economy. Indeed, it sets even tighter ratios than the GEAR for deficits and taxation to GDP. If that growth does not materialise, we could again end up with declining budgets – with devastating consequences for development and employment, as experienced in the past three years.
Even with the overall growth in the budget, in real terms, the increase in spending on the main social services – education, health and welfare – still remains slower than the growth in the population. That means spending will fall per person. This situation reflects the fact that the total increase in expenditure, not including interest or reserves, is only 0,2 per cent above population growth. But it also reflects the excessive increase in spending on defence – still one of the fastest-growing functions – as well as the inefficient financing of the GEPF.
In sum, the 2000 MTBPS does provide for some growth in social expenditure. But it does not really take on board the need to kick-start the economy to overcome the unemployment crisis and end economic stagnation. It does not go nearly far enough to eliminate poverty and restructure the economy. In contrast, to bring about real development, we need a policy that will protect and increase social spending. The People’s Budget aims to develop a viable and popular approach.
Contacts:
COSATU – Fiona Tregenna 021 461 3835
SANGOCO - Abie Ditlhaka 011 403 7746
SACC - Malcolm Damon 021 423 4261
Table of Contents
- Introduction
- Expenditure
- Revenue Issues
- Revenue Issues
- Impact on employment
- Toward a People's Budget
Box 1: Launch of the People's Budget
Box2: What is a People's Budget?
- Introduction
The MTBPS proposes a real increase in government spending on social services and infrastructure - for the first time in three years. That is in itself welcome. In contrast, the past three years saw a decline in spending on these functions. Still, even in the new MTBPS, the expansion of key functions like education, health, welfare and policing will lag behind population growth.
A concern is that the MTBPS apparently makes the expansion in spending contingent on rapid economic growth. As with the GEAR, if growth does not materialise, the result may then be further budget cuts, with disastrous implications for growth and development. Furthermore, the increase in committed spending – that is, spending minus reserves - in real terms is only very slightly above the growth in the population.
These weaknesses point to the need fundamentally to change the paradigm that underlies fiscal policy. That is the project of the People’s Budget, which is discussed in the accompanying documentation.
Above all, we must use the budget to invest in our people and our communities, ensuring a more productive and efficient society as the basis for economic expansion. This approach requires, in addition, an industrial strategy to overcome the legacy of a low-growth, low-wage economy and ensure that production shifts to meet changes in demand. In sum, we need an alternative development strategy that includes a fundamental restructuring of government budgets.
- Expenditure
- The MTBPS proposals on overall spending
The MTBPS proposes a nominal increase in expenditure, not including interest payments and reserves, of 7,7 per cent. That is 2,5 per cent above the expected CPI, while the population is reportedly growing at around 2,3 per cent a year.
The MTBPS also proposes a very rapid increase in contingency reserves, from R2 billion this year to R8 billion in 2003/4. In consequence, contingency reserves will rise from 1 per cent to 3,5 per cent of spending after interest. We consider the implications of this very high level of reserves below. We cannot take it into account in assessing government spending, since we have no way of knowing how it will be spent or indeed if it will be utilised at all.
The MTBPS proposals potentially reverse a decline of 1 per cent a year overall in total spending in the past three years. That decline undermined our ability to maintain and expand economic infrastructure, as well as to invest in our communities and households by improving health, education, welfare and policing.
- The relationship to GDP growth
Like the GEAR, the MTBPS expects to increase government spending while reducing it as a share of the GDP. This is possible only because it expects relatively rapid economic growth, averaging 3,5 per cent over the next three years. This compares with growth of less than 1 per cent in the past three years, and 3 per cent in 1994-’97.
The high predictions for growth means that expenditure will rise despite restrictive targets for deficits and tax revenues relative to GDP. Thus, the MTBPS foresees a drop in tax revenue from 26,3 per cent of GDP in 1999 to 25 per cent in 2003, and in the government deficit from 2,6 per cent to 2,1 per cent.
The danger, of course, is that if the GDP fails to grow as rapidly as hoped, the proposed targets will lead to stagnation or even a decline in government spending. The following table illustrates the impact of maintaining the existing proposals for spending as a share of GDP if growth comes in at under 3,5 per cent.
- Impact of key fiscal policy aims with different growth rates in GDP
% of GDP - MTBPS predictions
Average annual real change if annual GDP growth is:
1999
2003
as predicted (3,5%)
1%
2%
Total expenditure
26,2%
25,7%
2.5%*
0.1%
1.1%
Total expenditure after reserves
26,2%
24,8%
1,7%
-0,8%
0,2%
General government tax revenue
26.3%
25.0%
1.9%
0.1%
0.8%
Note: If growth is as predicted, at 3,5 per cent a year on average, the GDP would be R909 billion in 2003; at 1 per cent a year growth, it would be R845 billion; and at 2 per cent a year, it would be R871 billion.
*The MTBPS gives a somewhat higher growth rate for total expenditure because, without explaining why, it uses a deflator that is lower than the CPI.
Assessing the growth of expenditure after interest is more difficult, since the cost of borrowing is not directly affected by changes in the GDP. We can, for instance, assume that, first, interest costs remain the same irrespective of GDP growth, and, second, targets for total spending relative to GDP remain unchanged. If the GDP grows at 1 per cent a year, spending after interest and reserves would, under our assumptions, fall by almost 2 per cent a year; with GDP growth at 2 per cent a year, it would fall 0,8 per cent a year.
In this context, there are concerns that the government has not responded to calls to review the cost of apartheid-era debt.
In sum, like the GEAR, the 2000 MTBPS derives its growth in overall spending by setting expenditure relative to GDP. That leaves that risk that if the economy does not perform as well as expected, spending will be cut. In our opinion, that will lead us back into the vicious cycle of economic and social stagnation that characterised the last three years.
- Spending by function
Total growth is only growing slightly above population growth in real terms, while spending in two areas – defence and the GEPF – diverts funds from the priority sectors of social services and infrastructure. As a result, education, health and policing face reductions in spending per person. Only economic services, infrastructure and defence will expand relative to the population.
In this context, it is interesting that education is the slowest-growing function. Yet the MTBPS itself points to the critical importance of improving skills to bring about growth and boost employment creation.
MTBPS proposals on spending by function in real terms, per capita
In bns of 1999 rand*
Average annual growth
Functions
2000/1
2003/4
Overall
Per capita**
Economic services
12
14
5.2%
2.9%
Infrastructure
23
26
4.2%
1.9%
Defence and intelligence
13
15
2.9%
0.6%
Welfare
20
22
2.2%
-0.1%
Health
26
27
1.1%
-1.2%
Integrated justice system
24
24
1.0%
-1.3%
Administration
12
12
0.9%
-1.4%
Education
48
50
0.8%
-1.5%
Total
178
188
2.0%
-0.3%
As a function, defence enjoys the third fastest rate of growth, considerably more rapid than health, education, welfare and the justice system. This implicit prioritisation seems problematic, given that our greatest security risks arise internally, from rising unemployment and poverty.
Furthermore, the government continues to borrow heavily in order to increase investments in the Government Employees Pension Fund (GEPF). The fund now holds bonds that make up almost half the national debt. Furthermore, the government as employer pays 15 per cent of salaries, or around R9 billion a year, in pension contributions. As a result, the funding level of the GEPF has risen to well over 80 per cent.
As the Presidential Jobs Summit agreed, the funding of the GEPF should be reviewed to release more funds for developmental purposes. In the medium term, it would be more efficient to pay for public servants’ pensions through the budget, rather than from returns on investment in the GEPF. Reducing the employer contribution to 12 per cent would release R 1,5 billion a year for more productive uses; and cutting the funding level could provide additional resources.
In sum, the modest real growth in expenditure means very little increase in spending in per capita terms. Given inappropriately high expenditure on defence and the GEPF, the result is a decline per person in spending in the key social services.
- The contingency reserve
The MTBPS reflects the commitment to increasing the contingency reserve from R 2 billion in 2000 / 1 to R 8 billion in 2003 / 4. While a modest reserve seems desirable, this sum – at 3,4 per cent of other non-interest expenditure - is excessive.
A large contingency reserve effectively it reduces Parliamentary control over and public understanding of the budget. On the one hand, it gives the appearance of a substantial increase in expenditure, while in fact a substantial sum remains uncommitted. On the other, Parliament must approve a lump sum, and only retrospectively find out its applications.
- Revenue Issues
SARS has made progress in improving tax collection over the past few years, and indications are that there is still substantial room for further gains. The MTBPS, however, plans to hold revenues below the level set in the GEAR at 25 per cent of the GDP – which was widely criticised for being too low. The MTBPS foresees a marginal decline, from 23,8 per cent of the GDP in both 2000/1 and 2001/2 to 23,7 per cent in 2002/3 and 23,6 per cent in 2003/4.
To achieve these ratios, the Treasury has cut taxes whenever the Revenue Services (SARS) collects more than the amounts targeted. That effectively puts a lid on social spending. Moreover, the tax cuts have had a regressive impact, benefiting the rich more than the poor. Furthermore, they have not does enough to reverse the shift in the tax burden from companies to individuals over the past twenty years.
Research for the People’s Budget project clearly indicates substantial additional taxable capacity. In the light of this, as well as the pressing needs for delivery, the revenue parameters proposed in the MTBPS are far too low and need to be revised upwards.
- The budget process
Although the MTBPS has a section entitled "Progress With Budget Reform," it mentions neither a Money Bills Amendment Procedure Bill nor the long-awaited White Paper on budget reform. Like our elected representatives, civil society is frustrated by the lack of opportunity for meaningful input into the budget. A particular concern is the failure of the Department of Finance to meet its Constitutional obligation to table legislation let Parliament amend budgets.
The People’s Budget project will explore avenues to effect satisfactory reform of the budget process.
- Impact on employment
The MTBPS highlights the high level of unemployment, although unfortunately it cites the highly unreliable figures from the 1999 October Household Survey to downplay the crisis. At the same time, the MTBPS welcomes the 2-per-cent decline in public-service employment over the past two years. That means government lost over 20 000 jobs in that period, adding to the loss of over 100 000 public-service positions since 1994.
In addition to aggravating the unemployment crisis, these job losses point graphically to the cuts in services imposed by excessive fiscal restraint since 1997. Some four fifths of the public service are employed in education, health, police and defence. The cuts in employment in the public service have certainly contributed to the difficulties faced by these departments.
- Toward a People’s Budget
What is a People's Budget?
The People's Budget is an initiative of Congress of South African Trade unions (COSATU), South African Council of Churches (SACC) and South African National NGO Coalition (SANGOCO). The initiative dates back to several meetings that took place during the Anti-Poverty Hearings of 1997 and a meeting in November 1999 in Cape Town attended by a number of national NGO's, SANGOCO, COSATU, NEHAWU and the SACC.
We are organised around shared objectives and principles. The People's Budget aims, in the medium term, to:
Produce a progressive People's Budget framework on an annual basis within an appropriate macro-economic framework. However, it will not do line-by-line budgeting.
Demonstrate the feasibility of the People's Budget in terms of affordability by integrating it into a medium term budget framework and sustainable macro-economic policy.
We will do this by targeting key budget events such as the Medium Term Budget Policy Statement (November) and Budget Day (February).
We also aim to engage Cabinet , Parliament and the Finance Minister by:
widening the parameters of debate on economic and social policy in the country,
using the People's Budget as a tool for mass mobilisation and action;
campaigning for Parliament's role in amending the budget.
The basic principles underlying the People's Budget are:
reducing unemployment and protecting and creating quality jobs
meeting basic needs
redistribution of wealth
eradication of poverty
economic and social equality by race, gender and class
protecting the environment
restoring and enhancing of public services and social spending
contributing towards the building of a developmental state
enhancing the role of the state in the economy and strengthening the state as the driver of economic growth.
Why People's Budget?
The motivation for a People's Budget is to counter the deep budget cuts on public spending and reducing public sector employment, that budgets, since the introduction of GEAR in 1996, have seen in real terms, a shrinking of the budgets of the RDP ministries and this has had a massive impact upon the social needs of our people and service delivery. People's Budget will also provide alternatives, among others, in terms of taxation and revenue to GDP. The cuts in public spending are portrayed by government as being inevitable, as if government has no other choices and alternatives. The People's Budget will have to challenge this myth and counter the ideology of "There Is No Alternative" (TINA).
Part of this effort is to challenge what we believe is an undemocratic process which undermines the constitutional right of parliament to amend the budget and reduce capacity of civil society to influence budgets.
How will the People's Budget be developed?
The People's Budget policy content is developed in a series of policy workshops composed of researchers and participants in the initiative. The National Steering Committee (NSC) comprised of representatives from SANGOCO, COSATU and SACC will be playing a national oversight role in the People's Budget process. Management of the project will be run by National Labour and Economic Development Institute (NALEDI).Given that the nature of People's Budget is participatory and involves consensus, process of organisational mandate is ensured in each stage of the process.
Where are we now?
Beginning with our direct response to MTBPS on the 1st November 2000, we will be working together towards the Budget Day next year. We aim to address key concerns facing South Africa – unemployment and poverty. Our initial work so far has identified five basic component of the People's Budget Framework. These are:
an alternative macro-economic framework for a People's Budget;
social and economic infrastructure;
comprehensive social security system which will include a basic income grant and a national health insurance;
role of the public sector in job creation; and
land reform.
A People's Campaign
We intend to make the Peoples Budget a people's campaign. Mass mobilisation across the rest of the country will be secured in a number of ways. They will include, among others, teach-ins, training, mass actions, People's Budget Week. People's Forums and popularisation of the People's Budget. They will take place between the key budget events mentioned above. Elaboration of these actions will be announced soon.
Popular versions of the budget will always prepared by NGOs with speciality in the field.
Conclusion
Our starting point is that choices and alternatives do exist and that budgets are political documents, which reflect the priorities and values of those who put them together. The People's Budget acknowledges that current realities impose constraints on national policy. It acknowledges that meeting basic needs is not an overnight act. However, we reject the notion that government cannot do much except to cut, deregulate, privatise, downsize and let "market forces" show the way.
The framework document, which is the main document of this initiative, will constitute our vision of the kind of society we want to build - people-centred and caring society. It is a vision that is grounded on the following values: addressing social needs of our people, protect and create better employment, environmental sustainability, democratisation of society and the state and protection of social and economic rights.
The People's Budget process endorses a different analytical approach to the MTBPS, and on that basis a considerably larger increase in spending on the social services in particular.
- A developmental approach to fiscal policy
The MTBPS builds on the restrictive fiscal strategy of the past few years, leavened only by optimistic assumptions about economic growth. This approach essentially holds that:
The main cause of poverty and unemployment is slow growth
Slow growth results from low investment
Low investment is a consequence of high interest rates and high taxes, both of which result because government spending is high.
This approach leads to the insistence of cutting total spending as a percentage of GDP. As noted, the danger is that if the GDP does not grow, expenditure will be cut again in the next few years.
The People’s Budget process argues that this analytical basis ignores the disastrous need to increase investment in our people and our communities in order to counter the effects of apartheid.
The fundamental basis for evaluating a macro-economic strategy is its achievement of critical policy objectives. In South Africa, this involves an assessment of the impact on job creation, poverty reduction, redistribution, social delivery and economic growth. According to official statistics, South Africa’s macro-economic strategy since 1996 has been associated with massive job losses and increasing income inequalities and poverty.
Unequal and falling social investment form a central feature of the poverty trap in South Africa. In each year since 1996, real per capita expenditure on education, health, and welfare – a critical form of productive investment in South Africa - has fallen. This has undermined productivity growth, underpinning a low-wage labour market characterised not only by severe unemployment but also a large number of the working poor.
Poverty has been reinforced by a macro-economic focus on making the country more and more attractive to capital investment—frequently at the expense of labour. The most recent Reserve Bank Quarterly Bulletin documents the lowest growth in labour compensation in nearly 40 years, with a rising capital share increasingly skewed towards dividends rather than productive investment. The MTBPS itself notes that unit labour costs have been essentially stable in real terms in the past few years; and that despite massive poverty, wages have hardly increased at all.
Low wages feed into poverty, which in turn erodes the efficiency of fiscal policy. The following diagram illustrates the circular nature of this poverty trap.
Fiscal policy has interacted with monetary, labour and industrial policy in contributing to the perpetuation of South Africa’s poverty trap. Monetary policy has focused exclusively on financial stability, ignoring its constitutional role in supporting sustainable economic growth and development. Labour, trade and industrial policies have missed important opportunities to shift the productive sector onto a labour-demanding growth path.
The diagram below depicts how a more developmental strategy could break the vicious cycle of poverty, building on the reinforcing nature of the component macro-economic policies. In this strategy, which is essentially captured in the RDP, increased social investment combined with appropriate labour and industrial policies support higher wages that reduce poverty.
This strategy bolsters the effectiveness of fiscal policy, since efficient social delivery produces a greater growth effect if the economy can break out of the poverty trap. Expanding access to education is not as efficient if households lack the resources to provide learners with adequate nutrition. Expanding access to electricity fails to yield optimal results if households lack the capacity to pay the associated service charges. With higher wages and less poverty, fiscal policy has a stronger effect promoting economic growth and job creation.
An appropriately balanced developmental monetary policy can reinforce these effects. Higher rates of economic growth in turn expand the fiscal resource base, supporting even greater levels of social delivery, and the "virtuous cycle" is accelerated.
- Simulations of alternative fiscal policies
Simulations using a macro-economic model provide alternative scenarios that lend insight into the impact of a social investment strategy on economic growth and public finances. We here focus on a scenario of moderate expansion.
In this scenario, government increases expenditure on the basis of a 3-per-cent fiscal deficit target combined with modest increases in taxation, with the resulting resources channelled into social investment. The model suggests that as a result, the real growth rate would increase substantially, yielding significant increases in job creation because of the labour-intensive nature of the expansion.
The initial expansion in growth results from a combination of a demand stimulus and an increase in productive capacity as social investment bolsters labour and capital productivity. The longer-term results reflect more fully the positive effects of social investment on expanded economic capacity. The real growth rate rises to 4,9 per cent over the three-year horizon.
In spite of the higher levels of borrowing, the public debt (measured relative to national income) falls more rapidly than projected by the government in the MTBPS, since the growth rate of the economy is significantly higher. The increase in available resources to finance social investment rises gradually, from R14.2 billion in 2001/02 to R45.7 billion in 2003/04. This gradual expansion is designed to accommodate a measured development in the public sector’s capacity to efficiently deliver social investment.
We have also simulated alternative scenarios, providing an assessment of more expansive social investment approaches. The leading policy in this framework is a rapid expansion of social investment that increases overall economic activity while reinforcing the capacity of the economy to supply goods and services.
The structure of the public investment spending will target labour-intensive sectors of the economy—primary health care, education, and low cost housing. Improved equity will be nurtured through labour policies that support greater rights and higher money wages. The greater labour costs are offset by the implicit subsidy provided by higher social wages as well as the resulting improvements in labour productivity.
The strategy further promotes job creation by raising the relative cost of capital, shifting resources to labour and consequently mobilising resources for financing the social investment. More progressive taxation and judicious borrowing will also finance the costs of the transformation programme while further stimulating demand and nurturing labour-intensive enterprises. Vital institutions in civil society play a critical role in ensuring the efficient allocation of resources.
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