The People's Budget 2001 Proposals by COSATU, SACC, SANGOCO, 21 February 2001

The People's Budget 2001: Summary Introduction The People's Budget presents an alternative to the current macro-economic framework. Without attempting a detailed alternative to the national budget, it demonstrates the need for basic changes in the orientation of fiscal policy and expenditure. The proposals were developed jointly by the Congress of South African Trade Unions (COSATU), South African Council of Churches (SACC) and the South African NGO Coalition (SANGOCO), with technical support from the National Labour and Economic Development Institute (NALEDI). The People's Budget 2001 should become a living document, supporting broad-based discussion, education and action to ensure the budget process increasingly reflects the needs of the majority of South Africans. The People's Budget arose largely in response to the deep budget cuts in public spending since the introduction of GEAR in 1996. These cuts have reversed many of the gains we made in the first few years after the transition to democracy. The Speak Out on Poverty hearings convened by COSATU, SANGOCO and the SACC in 1997 exposed the impact of these cuts on people's lives. The challenge of reconstruction and development The key problem facing South Africa remains the poverty and inequality left by apartheid. South Africa ranks as the third most unequal society in world, surpassed only by Brazil and Guatemala. Virtually all studies show that since 1994, no real improvement has occurred in this regard. Poverty is worst in the rural areas, particularly in the regions that include the former homeland areas. South Africa faces a classical poverty trap. Massive inequalities and associated poverty prevent growth and development, which in turn worsens poverty. Poverty limits domestic markets and lowers the productivity of the labour force by making it harder for people to acquire skills and by undermining social cohesion. For this reason, the RDP argued that growth must be combined with redistribution. After the transition to democracy in 1994, the government responded to this vicious cycle with four strategies that, at least in part, contradicted each other: A robust effort to redirect government spending toward historically deprived communities, GEAR, An industrial strategy focused primarily on improving competitiveness and especially exports, and A labour policy designed to shift from the oppressive colonial relationships of apartheid to a modern labour market. GEAR reinforced the vicious cycle of poverty. The tight restrictions it placed on government spending contradicted the need to improve government services for the majority of South Africans. The failure of the GEAR strategy emerged in massive job losses, slow growth and low investment in the past three years – trends documented by the People's Budget. Toward a developmental budget A developmental strategy must break the vicious cycle of poverty by addressing poverty through government programmes and an equitable growth strategy. In that context, besides the normal administrative and security functions, the state must fulfil four roles: Driving a growth strategy that focuses on providing strong policy support for sectors to protect and create quality jobs, meet basic needs for the poor, and expand exports; Providing a higher social wage – that is, government services and grants provided to households in addition to earned income; Strengthening democracy; and Supporting alternative centres of economic power - a stronger state sector, co-operatives and small and micro enterprise, based in part in land reform, improved housing, and investment in skills development. The expansion of the social wage must be shaped to stimulate investment and employment. For instance, housing programmes must locate workers near to jobs, to minimise commuting costs; education must provide necessary skills; and socialised health care must control the soaring cost of medical aids. The apartheid system left a heavily distorted structure of spending on the social wage, with virtually no support for black households. Between 1994 and 1996, substantial progress was made in improving social services and infrastructure in historically black communities. Thereafter, GEAR led to fresh cuts in the social wage. In 1996-'99, real expenditure on education, health, welfare and infrastructure fell each year, while police and housing remained virtually unchanged. The decline in per person terms was obviously even larger. The MTBPS for 2000/1 to 2003/4 projected real growth of about 2 per cent overall. But the bulk of the increase will benefit defence, economic services and infrastructure. Education, health, welfare and policing still face reductions in spending per person over the next three years. The People's Budget proposes that real annual expenditure on infrastructure, welfare, health, the justice system and education increase at least 2 per cent over population growth for the next four years. By 2004, that will restore spending on the social wage, in real per capita terms, to 1996 levels. To accommodate this increase, by 2003/4 the budget as a whole will have to increase by R12 billion over current MTBPS projections. The People's Budget proposes a basic income grant as a critical component in an effective comprehensive social security system. The basic income grant would provide R100 to R200 a month to every individual, offset against other social grants. Initially, it would be funded primarily through a solidarity levy on the rich. A grant of R100 a month to all South Africans aged over 17 and under 65 would cost around R25 billion a year. If paid to all individuals over six, it would cost about R40 billion a year. As the grant provides the basis for economic growth in the medium term, the relative fiscal burden reduces over time. The People's Budget further proposes a national health-insurance scheme (NHI). The NHI would integrate private and public health facilities into a single system funded through the budget. It would be funded by the existing budget plus a progressive dedicated levy equal to existing private health costs. The levy would be on high incomes, both salaries and other, and would effectively replace, not increase, the current cost of health insurance and medical schemes. The People's Budget proposes a substantial increase in spending on treating and preventing HIV/AIDS. Critical treatment strategies include obtaining cheaper medication; treatment for opportunistic diseases and STDs; use of anti-retroviral therapies including, but not restricted to, prevention of mother-to-child-transmission; and establishing a proper infrastructure for counselling. It is also critical that government make condoms available on a broader basis. The current budget for condom provision suffices to provide around five condoms per adult South African a year. Yet many adults cannot afford to buy condoms, and in remote areas they may not be available at all. The cost of anti-retroviral treatment and condoms alone would come to around R7 billion a year – but the savings to society are inestimable. The People's Budget proposes increased funding for basic education and skills development. Between 1996 and 1999, in real terms spending on education shrank by 3 per cent a year. The 2000 MTBPS projects only 0,8 per cent growth on average in the coming three years – well below the rate of growth in the population. Four main areas of under-resourcing have emerged in education, especially in historically black rural areas: the virtual absence of auxiliary staff – cleaners, security personnel and clerks; the lack of mathematics, science, culture and art teachers; the weakness of basic school infrastructure; and the near-absence of government under-funding for Early Childhood Development (ECD) and Adult Basic Education and Training (ABET). To deal with the budget shortfall, the education system has permitted schools to levy fees. This system contributes heavily to inequalities. Schools in richer areas can charge more, letting them hire more staff and improve their equipment. But poor children cannot afford the fees to these schools. The People's Budget proposes a repositioning of infrastructure spending. The delivery of infrastructure must go beyond meeting minimum basic needs to providing a basis for household economic activity. In particular, housing programmes that perpetuate settlement far from urban centres and employment cause higher transport costs for workers, difficulties in providing government services and municipal infrastructure, and falling building standards. Moreover, the current cuts in budgets have undermined maintenance, which will ultimately impose very heavy costs. The problems identified with existing infrastructure programmes will be aggravated by strategies pushed by the national Department of Finance to encourage greater private investment in and competition around infrastructure provision. These strategies seem likely to limit the extension of quality infrastructure to the poor. A developmental fiscal package After looking at proposals on expenditure, the People's Budget proposes both ways to increase funding for developmental programmes as well as measures to improve the quality of spending. The Economic Policy Research Institute (EPRI) modelled the implications of higher taxes and deficits for the People's Budget. It provided three possible scenarios. All of them increase both taxes and government borrowing. The resources raised are channelled into productive social spending – specifically: Improvements in the social wage, which stimulate domestic demand and increase capital and labour productivity, and A targeted growth strategy that encourages investment and employment creation. As a result, the initial rise in the deficit relative to GDP is soon reversed, demonstrating the sustainability of a somewhat more relaxed fiscal stance. The People's Budget further proposes the introduction of multiple VAT rates in order to counter the regressive nature of the VAT. The People's Budget rejects the idea of funding developmental programmes like the Basic Income Grant through an increase in the VAT, which some sectors of private business and opposition parties have proposed. That would effectively support the very poor only by taxing the poor. Research shows that households earning R1500 a month pay 10 per cent of their income on VAT, compared to 7 per cent for those earning over R10 000 a month. Yet in the past three years, tax cuts have concentrated on personal income tax and corporate taxes. Since only those earning over around R2000 a month pay income tax, these reductions do not benefit the poor. Although many theorists argue for a single, uniform rate, only 18 countries have actually adopted this approach. Most countries zero-rate basic necessities, and many have higher rates for luxuries. The People's Budget proposes an extension of zero rating to additional basic necessities beyond those already zero-rated by government, and an increase in VAT on luxury goods. This system would mitigate the regressive burden of VAT without affecting overall government revenues. A third leg of the developmental fiscal package is to restructure the Government Employee Pension Fund (GEPF). The Presidential Jobs Summit agreed on the importance of reviewing the funding of public servants' employees as a way to release resources to increase social spending. Most public service unions have supported this review. A modest reduction in the level of funding of the GEPF could release substantial resources. The People's Budget proposes: The employer contribution could be reduced to 12 per cent of salaries. That will save a total of R1,5 billion a year. The funding level could be reduced by 2 per cent, or R3 billion a year, for the next three years, and the funds utilised for once-off investments in infrastructure and housing. A more substantial reduction in the level of funding, establishing a fully Pay-As-You-Go system, would release even more resources. Finally, the arms procurement programme, currently estimated at R43 billion over the next ten to twenty years, effectively shifts spending from the social wage to defence. Since the contracts are mostly denominated in dollars, if devaluation is more rapid than expected the impact will be even greater. According to the MTBPS, defence spending rose from 6,7 per cent of total spending in 1999/2000 to 7,5 per cent in 2000/1, and will stabilise at 7,7 per cent for the next three years. Defence will grow by 8,5 per cent a year over the period, compared to 7,6 per cent for expenditure as a whole, and only 6,6 per cent for the main social services and the criminal justice system. The magnitude of the defence spending appears when we look at total expenditure on programmes for "poverty relief and job creation," which the 2000 Budget Review gives as around R5 billion between 1999/2000 and 2002/3. An unexpected deterioration in the exchange rate would have even more severe implications for the social wage. Some 85 per cent of the package is denominated in foreign currencies. Given the expected slow real growth in the budget, rapid depreciation would squeeze other functions even more than anticipated. Contractual obligations make it difficult to reduce spending on arms procurement in the short run. The People's Budget proposes, however, that any further procurement be subject to the strictest possible scrutiny. Government should immediately inform vendors that it will not procure additional armaments under existing contracts. If evidence of corruption surfaces, South Africa should withdraw from the existing contracts. The People's Budget also explored ways to improve the quality of government spending. Reports on under-spending in government departments have created the impression that they do not have the capacity to spend more resources. In the event, under-spending came to only about 2 per cent of expenditure by national departments in 1999/2000. More recent figures and data on provinces are not available. Almost 80 per cent of under-spending came from just four departments – Welfare, Health, Trade and Industry and Public Works. In every one of these cases, the programmes that displayed under-spending aimed at providing funds to small businesses or NGOs. In contrast, the big social services had no problem spending their entire budget through their normal delivery systems. Various factors inhibit the ability of departments to spend their budgets effectively. They include excessive reliance on private partners, systemic weaknesses in conditional grants, lack of appropriate management skills, the procurement system, and the broader effects of fiscal restraint. A key problem in the spending of many government departments is the question of sustainability. Central weaknesses include the separation of responsibility for capital and current budgets, so that one agency puts in infrastructure but another is responsible for staffing and maintaining it; and unsustainable standards for delivery as a result of budget cuts.

Table of Contents

1. Introduction

1. What is the People's Budget?
2. Aims of the People’s Budget

2. The challenge of reconstruction and development

1. Poverty and inequality
2. Factors leading to poverty and inequality

3. Toward a developmental budget

1. The developmental role of the state
2. Fiscal implications of the proposed growth path

4. Translating Vision into Reality

1. A developmental fiscal package
2. Building Public Service Capacity
3. Towards Solutions

Appendix 1

Acronyms

Box 1: What’s Happening with Unemployment?

Box 2: Preventing Mother-to-Child Transmission of HIV

Box 3: A Framework for Assessing Public Spending Acknowledgements

For further information...

• Press Release: Comment on Government's Budget
• Press Release: People's Budget 2001
• Towards a People's Budget: COSATU Comment on the Medium Term Budget Policy Statement
• SANGOCO: Speak Out on the Budget

Introduction

This document presents an alternative to the current macro-economic framework, one that meets the aspirations of a nation aiming to accelerate social transformation. Our proposals should contribute to a shared national vision on growth and development. They show that a better way to meeting our developmental challenges is not only possible, but also a national imperative.

These proposals, developed jointly by the Congress of South African Trade Unions (COSATU), South African Council of Churches (SACC) and the South African NGO Coalition (SANGOCO), move beyond criticism of existing policies to provide workable, credible and progressive alternatives.

We look forward to discussing our ideas with communities, government, parliament and business. We pose to all our partners the challenge of going beyond criticism to the development of constructive proposals.

This document has four sections:

• A brief overview of the People’s Budget Campaign
• An assessment of the development challenges facing government and the unintended consequences of the current macro-economic policy
• An integrated set of proposals for improving government programmes
• Measures to ensure that those proposals are carried out, including a developmental approach to fiscal policy and ways to enhance the capacity of government to deliver.

1.1 What is the 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), with technical support from the National Labour and Economic Development Institute (NALEDI).

The People’s Budget aims, first and foremost, to stimulate broad discussion and mobilisation around how government uses its resources. To that end, it will produce a fiscal framework every year, based on in-depth research. The framework will explore the main tasks facing government in ensuring social and economic development and growth, and assess the fiscal implications.

The People’s Budget will not attempt to provide line-by-line alternatives to the national budget. We are not trying to replicate the work of government. Rather, we aim to demonstrate where strategic changes in fiscal policy and expenditure patterns can intensify the fight against poverty and ensure sustainable economic development.

This year’s framework is based on:

• Budget hearings with civil society formations;
• Consultation with a variety of organisations and structures, both inside and outside the SACC, SANGOCO and COSATU; and
• Research into fiscal and economic issues, in part by NALEDI, and the Economic Policy Research Institute (EPRI).

In the coming year, we will continue with research into the budget itself, focusing on provision for land reform, HIV/AIDS, free basic services and skills delivery; and on ways to improve government spending, including a deeper analysis of under-spending, the restructuring of state-owned assets, public-private partnerships and prescribed assets.

The People’s Budget will also develop educational material and campaigns to ensure broad mobilisation around the budget and to engage with the Treasury, Cabinet, Parliament, and the wider South African public.

1.2 Aims of the People’s Budget

The People's Budget arose largely in response to the deep budget cuts in public spending since the introduction of GEAR in 1996. These cuts have reversed many of the gains we made in the first few years after the transition to democracy. The Speak Out on Poverty hearings convened by COSATU, SANGOCO and the SACC in 1997 helped to expose the impact of these cuts on people's lives.

The People's Budget seeks to demonstrate that the ideology of "There Is No Alternative" (TINA) is profoundly mistaken. At the same time, it will increase the capacity of civil society to influence the budget process, and support the constitutional right of parliament to amend the budget.

The People’s Budget will define fiscal strategies that can alleviate poverty, support economic development and ensure greater equity by race, gender and class, by

1. meeting basic needs, especially by restoring and enhancing public services and social spending,
2. ensuring the retention and creation of quality jobs in a context of economic growth,
3. giving the majority of our people greater access to assets and skills,
4. enhancing democratic and participatory governance, and
5. protecting the environment and ensuring development throughout the southern African region.
    

The challenge of reconstruction and development

The key problem facing South Africa remains the poverty and inequality left by apartheid. We here first review the extent of the problem, and then outline a development strategy to address it. Finally, we contrast that strategy with GEAR.

2.1 Poverty and inequality

A recent report by the United Nations Development Programme argues that:

The final fifteen years of the apartheid era saw a massive transfer of wealth from the poor to the rich: between 1975 and 1991, the income of the poorest sixty percent of the population dropped by about 35%. By 1996, the gulf between rich and poor had grown even larger. The poorest quintile received 1.5% of the total income, compared to 65 percent received by the richest quintile and 48% percent by the richest 10%. (United Nations Development Programme: 2000)

The report ranks South Africa as the third most unequal society in world, surpassed only by Brazil and Guatemala.

The massive inequalities in income and wealth translate into extensive poverty. About half of all South Africans, some 18 million people, live in households that earned less than R350 a month in the mid-1990s. Poverty is worst in the rural areas, as the following table indicates. The regions that include the former homeland areas have far higher rates of poverty. They account for over two thirds of all poor households in South Africa.

Table 1. Poverty by province

Province	% of Population in Poverty	Provincial Share of National Poor
Northern Province	78%	18%
Eastern Cape	74%	22%
Mpumalanga	64%	8%
KwaZulu-Natal	63%	21%
North West	61%	9%
Northern Cape	58%	2%
Free State	54%	6%
Gauteng	32%	10%
Western Cape	29%	4%

Source: UNDP 2000

2.2 Factors leading to poverty and inequality

South Africa faces a classical poverty trap. In this situation, massive inequalities and associated poverty prevent growth and development, which in turn worsens poverty. Specifically, poverty lowers the productivity of the labour force by making it harder for people to acquire skills and by undermining social cohesion. Since it reduces household incomes, it limits domestic markets. For this reason, the RDP argued that growth must be combined with redistribution.

The following diagram portrays the vicious cycle that underlies the poverty trap, where poverty reinforces low growth, which in turn worsens poverty.
 

 

After the transition to democracy in 1994, the government responded to this vicious cycle with four strategies that, at least in part, contradicted each other:

• A robust effort to redirect government spending toward historically deprived communities,
• GEAR,
• An industrial strategy focused primarily on improving competitiveness and especially exports, and
• A labour policy designed to shift from the oppressive colonial relationships of apartheid to a modern labour market.

GEAR reinforced the vicious cycle of poverty by supporting an economic strategy that did little to support greater equality. Because its proposals for restructuring the economy remained weak, it effectively maintained South Africa’s historic growth trajectory. That growth path effectively emphasises minerals production and refining for export – which generates few jobs, strengthens big business, and reinforces the underdevelopment of the rural areas. Meanwhile, tight money policies were enforced through measures to increase interest rates, discouraging domestic investment.

At the same time, GEAR called for measures to reduce the bargaining power of labour. As that would limit both wages and skills development, as well as aggravating conflict in the workplace, it would worsen productivity problems. This component of GEAR contradicted the new labour policy, which involved new laws designed to encourage the more productive use of labour through greater permanency, protection of labour rights and collective bargaining, and widespread skills development.

For the budget, a central contradiction emerged between the need to improve government services for the majority of South Africans and the tight restrictions placed on government expenditure by GEAR’s fiscal targets. As a result, as discussed in Chapter 3, spending on social services and infrastructure declined steadily in real terms in the second half of the ‘90s, undermining a central strategy for addressing poverty.

In the event, the failure of the GEAR strategy emerged in massive job losses, slow growth and low investment in the past three years. The following table contrasts real achievements with the GEAR targets. It shows that government cut the deficit even more than expected, but the outcomes in terms of development and economic growth did not come close to expectations. In particular, employment fell massively, instead of increasing; private-sector investment grew only painfully slowly; and GDP growth averaged 2,4 per cent a year, compared to GEAR’s projection of 4,2 per cent.

Table 2. GEAR projections and actual achievements, 1996-‘99

Toward a developmental budget

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. This strategy bolsters the effectiveness of fiscal policy, which will have a greater effect promoting economic growth and job creation if households have higher living standards and greater access to resources and skills. Higher rates of economic growth also expand the fiscal resource base, supporting even greater levels of social delivery, accelerating the virtuous cycle.
 

 

To break out of the poverty trap requires an unambiguous conceptualisation of the strategic role of the state in development. The budget must then be reshaped to accord with that view. For this reason, the following section outlines the developmental role of the state. It then considers the implications of the strategy for government expenditure.

3.1 The developmental role of the state

In addition to the normal administrative functions, an effective development strategy requires that the state fulfil four roles.

First, the state must drive a growth strategy that focuses on providing strong policy support for sectors to protect and create quality jobs, meet basic needs for the poor, and expand exports.

Second, the state must provide a social wage that sets a floor under living standards for all South Africans. The social wage comprises government services and grants provided to households in addition to earned income. It should ensure that no one faces absolute poverty.

The social wage must

• provide welfare grants, education, health care, policing and housing at a level sufficient to support community development;
• accelerate skills development and improve education on a mass scale;
• develop more efficient, socialised systems to meet retirement, transport and health needs for working people, which effectively enhances the efficiency of the economy as a whole; and
• be designed to support economic growth and employment creation.

Third, the state must also transform itself to strengthen democracy and the public sector through the establishment of systems to permit greater participation by the majority, who historically have been shut out of power, as well as more coherent and effective delivery systems and structures. Steps to achieve this end include establishment of participatory procedures for policy development and strengthening Parliament, especially to amend money bills and participate in policy development. They must also include measures to control lobbying by big business and to limit patronage and corruption.

Finally, the developmental state must support alternative centres of economic power. All the other strategies can contribute to this aim. They can change the nature of wealth by supporting a stronger state sector, co-operatives and small and micro enterprise, linked in part to land reform, improved housing, and investment in skills development.

3.2 Fiscal implications of the proposed growth path

Adapting the budget to overcome the poverty trap requires that the budget increase to support

• an effective strategy to restructure the economy, co-ordinated with measures to improve the social wage;
• expansion of the social wage in general, with the introduction of a Basic Income Grant, and establishment of National Health Insurance, and stronger measures to combat HIV/AIDS;
• a coherent skills development strategy; and
• better integration of infrastructure and housing development with the overall growth strategy.

We here first consider the proposals for achieving these aims. Section Four then explores the broader policy changes required to implement them – above all, a developmental fiscal strategy and increasing the capacity of the state.

3.2.1 Fiscal implications of economic reconstruction and development

To create jobs and establish a more stable basis for growth, a growth strategy must systematically restructure production. In particular, the economy must move away from the more traditional export sectors of minerals refining, which are associated with limited employment creation and large-scale capital, to relatively labour-intensive industries. The strategy should focus, not only on expanding exports, but also on ensuring production of goods that meet basic needs, reducing the cost of living while raising living standards. Growth sectors would then include, for instance, agriculture and food processing; services and tourism; infrastructure provision; and cultural industries.³

A critical first step is to develop sectoral strategies to guide government, capital and labour. These strategies must ensure that production shifts to meet changes in domestic demand that result from improvements in the social wage. They must also help diversify exports. Government can support sectoral strategies through:

• Targeted investment in transport, communications, schools, clinics and other infrastructure;
• Measures to ensure that the financial sector supports new kinds of production, including self-employment and co-operatives, as well as low-income housing;
• A review of tariffs to ensure that reductions do not unnecessarily harm employment;
• Rigorous implementation of the skills development process;
• Greater support for constructive implementation of new labour policies including in agriculture, domestic labour and other sectors that must make a substantial adjustment;
• A strategy to ensure retail networks support domestic production and ensure efficient distribution of wage goods; and
• Rapid redistribution of land and measures to ensure the security of tenure.

In this context, the expansion of the social wage must be shaped to stimulate investment and employment. For instance, housing programmes must locate workers near to jobs, to minimise commuting costs; education must provide necessary skills; and socialised health care must control the soaring cost of medical aids.

The main new costs of the proposed growth strategy arise from improvements in the social wage and skills development, which are discussed below, and from land reform.

3.2.2 Improving the social wage

The apartheid system left a heavily distorted structure of spending on the social wage, with very high levels for historically white communities and virtually no support for black households. Overcoming the poverty trap requires that this situation be overcome urgently by extending an adequate social wage to all communities.

As the following table shows, discrimination in government spending between communities under apartheid resulted in huge differences in infrastructure by province. The provinces that incorporated substantial homelands show the largest infrastructure deficits. Similar differentials exist in the main social services – health, education, welfare and policing.

Table 3. Infrastructure provision by province, 1996

Between 1994 and 1996, substantial progress was made in improving social services and infrastructure in historically black communities. Thereafter, the restrictive fiscal policy associated with GEAR led to fresh cuts in the social wage. In 1996-‘99, real expenditure on education, health, welfare and infrastructure fell each year, while police and housing remained virtually unchanged. The decline in per person terms was obviously even larger, given population growth of between 5 and 7 per cent over the period. As a result, the provision of new infrastructure and housing remained slow, with a particular poor record for maintenance. The main social services experienced stagnant delivery at best.

Table 4. Changes in expenditure on social wage by function, 1996/7 to 1999/2000, in nominal and real terms (deflated using CPI)

Declining real spending on the social wage undermined productivity growth, underpinning a low-wage labour market characterised not only by severe unemployment but also a large number of the working poor. At the same time, it further limited domestic demand.

The MTBPS expected to reverse the decline in the social-wage functions, permitting real growth of about 2 per cent overall. But the bulk of the increase will benefit defence, economic services and infrastructure. Education, health, welfare and policing still face reductions in spending per person over the next three years.

As the following table shows, in the next three years education will be the slowest-growing function. Yet the MTBPS itself points to the critical importance of improving skills to bring about growth and boost employment creation. In contrast, defence enjoys the third fastest rate of growth, considerably more rapid than health, education, welfare and the justice system. This prioritisation appears to ignore our greatest security risks – that is, rising unemployment and poverty.

Table 5. MTBPS proposals on spending by function in real terms, per capita

Overcoming the poverty trap requires that the real annual increase in expenditure on infrastructure, welfare, health, the justice system and education be at least 2 per cent over population growth for the next four years. By 2004, that will restore spending, in real per capita terms, to 1996 levels.

To accommodate this increase, by 2003/4 the budget as a whole will have to increase by R12 billion over current MTBPS projections. The overall rate of growth of the budget would then climb to 4 per cent a year in real terms.

Within the overall increase in spending, the People’s Budget proposes the following programmes to strengthen the social wage.

3.2.3 The Basic Income Grant

The system of social grants should ensure a minimum income for all South Africans. The current set up does not come close to reaching that goal. For this reason, People’s Budget proposes a basic income grant as a critical component in an effective comprehensive social security system. The basic income grant would provide an effective, administratively easy mechanism to substantially raise the income of poor households.

The current system of grants shows three major weaknesses.

First, research conducted shows that over 13,8 million people in the poorest 40% of South Africa’s households do not qualify for any social security transfers. (Haarman 1998) Only the old-age pension is adequately focused on poor households. The other grants are still disproportionately located in the Northern and Western Cape. Overall, welfare spending per person is not well related to the level of poverty in a province.

Second, old-age pensions and child-care grants account for the bulk of payments. These grants are important in alleviating hardships, but are targeted according to age and so may do not reach all poor households.

Third, most grants have declined in real terms in recent years, and none of them reach the entire population for which they are designed. Relative to headline inflation, the old age pension and disability grants have dropped by almost 20 per cent. The child grant has not increased since its introduction in 1998, so relative to inflation it has already fallen by 10 percent. Compared to the inflation rate for low-income people, which is somewhat higher than the overall CPI, these grants have fallen even more.

The latest MTBPS proposes that welfare spending as a whole should grow at 2,2 per cent, just below the rate of growth in the population. Within that amount, however, the Welfare Department proposes to cut the share of spending on social security from 90 to 80 per cent of the budget. This will cause further restrictions on grants.

In sum, the current system of grants represents a critical support for many of the very poor. But measured against the needs of the poor, it remains inadequate.

In light of the difficulties with the existing social grant system and the delays in extending basic services to the poor, the People’s Budget calls for the introduction of a basic income grant. The basic income grant would involve a relatively small sum – between R100 and R200 – paid to all individuals every month. Because it is a flat sum, the proposed grant is highly progressive.

Obviously, the central aim of the proposed grant is to increase incomes for the poor. But the grant would also provide a degree of household and community development, laying the foundation for more productive and skilled communities over time. It would ensure that even the poorest households have a little cash to support economic engagement.

Universal coverage and sustainability are crucial for the basic income grant to take effect as proposed.

Universal coverage – payment to all individuals – will:

1. Minimise administrative burdens. As the current systems for social grants and municipal services demonstrate, government simply does not have the capacity to utilise means tests efficiently. The welfare administration is already over-stretched by the existing grants. Payment through the PostBank could further streamline delivery.
2. Favour larger households, which tend to be poorer and have greater needs.
3. Benefit women and young people directly. That should increase their power and autonomy within the household economy, which in the long run should help reduce the abuse of women and children. That in turn should support social cohesion and skill enhancement, limit the spread of HIV, and ultimately sustain social and economic development.
4. Reach not only the unemployed but also the working poor, who constitute a very large share of people officially classified as employed. Farm and domestic workers, people trying to eke out a living in the informal sector, and even large sections of the formal sector earn incomes well below the poverty line.
5. Reduce the disincentive to work and stigmatisation associated with the dole as found in other countries, where a means test is applied. In effect, a means test may require people to choose between earned income and the grant.
6. Help overcome the risk of corruption, by reducing officials’ discretion over who gets the grant.

A second critical aspect is fiscal and economic sustainability. This sustainability has two foundations: the proposed financing mechanisms, and the longer-term stimulus to the economy.

Essentially, the grant would be partially funded through a solidarity levy on the high-income group. The levy would recoup the cost of the grant to the well-off, plus some additional funds from the very high-income group. We propose a levy in the form of a surcharge on income tax averaging 17,5 per cent for the top two quintiles. EPRI studies of tax effort indicate that this levy is sustainable. Haarman (2000) calculates that the levy would raise around R15 billion, covering three quarters of the cost of the grant. It would be borne essentially by the top quintile of income earners.

More fundamentally, the sustainability of the grant must be seen in a dynamic context. As the grant provides the basis for economic growth in the medium term, the fiscal burden reduces over time relative to the budget and the economy as a whole. In that sense, it represents a critical investment, whose longer-term returns more than justify the short-run costs.

In sum, the basic income grant essentially ensures an adequate social wage for all the poor by overcoming the weaknesses in public administration and the inappropriate financing systems that bedevil current systems. In the process, it should support social and economic changes that are critical to overcoming the poverty trap and initiating sustainable development. Moreover, it will give a degree of stability to households, protecting them from the vagaries of the market.

If a grant of R100 a month were provided to all South Africans aged over 17 and under 65, the cost would come to around R25 billion a year. If paid to all individuals over six, the cost would come to about R40 billion a year. About R15 billion of the cost would be met through the solidarity levy.⁴

3.2.4 National Health Insurance

South Africa spends 8,5 per cent of its GDP on health, yet the outcomes – measured for instance by child, infant and maternal mortality and life expectancy – are worse than other middle-income developing countries. The reasons lie in part in inequalities in the health system, and in part in the lack of basic infrastructure to ensure clean water and sanitation for many of our people. The HIV pandemic has aggravated the situation. To remedy this situation, the People’s Budget proposes a national health-insurance scheme.

The co-existence of private and public health care forms an important factor behind the inefficiency of health spending in South Africa. The private sector provides the best care in the world for those who can afford it, while the majority continues to rely on inadequate public services. Private health care serves less than 20 per cent of the population, but absorbs two thirds of total health spending. In contrast, the public health sector serves the majority of our people, but remains under-resourced, resulting in poor quality care.

Only about 7 million South Africans, of whom only 9 percent are Africans, are covered by private medical schemes. The annual revenue of the private medical schemes comes to R25 billion a year, about 20 per cent more than the total public health budget.

Meanwhile, the public health system faces rising demand and falling budgets. After 1994, government opened facilities to all races, provided health care free to mothers and young children, and expanded primary health care. These measures should ultimately reduce costs for curative care, but initially led to higher referrals to hospitals, with a consequent increase in costs there as well.

In the same period, budgets for health declined relative to inflation. Between 1996/7 and 1999/2000, provincial health budgets rose 4 per cent a year, with inflation at 7,7 per cent a year. In other words, in real terms health budgets dropped by over 3,5 per cent a year, or close to 10 per cent in three years. At the same time, the population was growing at over 2 per cent a year. In per capita terms, then, the health budget dropped by 15 per cent over the period. Of the new health care facilities constructed in the past six years, 46 per cent⁵ did not have an adequate supply of clean water and electricity. Many clinics are opened without necessary staff or resources.⁶

The two-tier system promotes a mal-distribution of resources and wastage, inflates health costs, and defeats the commitment to a health care for all. On the one hand, private health care has seen extraordinarily rapid increases in tariffs, largely due to excessive profits and administration costs, with increased instability among medical-aid schemes. On the other hand, the private health care system actively weakens the public health care system by shifting the cost of caring for patients with serious illnesses, including HIV, onto the public sector; and by setting up a parallel system of (expensive) private hospitals that diverts potential paying patients from public hospitals.

The People’s Budget proposes National Health Insurance (NHI) to end the two-tier system by incorporating all health resources into the public sector. A new NHI Authority would allocate the health budget to hospitals and practitioners. It would be funded by the existing budget plus a progressive dedicated levy equal to existing private health costs.

The levy would be on high incomes, both salaries and other, and would effectively replace the current cost of health insurance and medical schemes. Because it would replace employee-employer insurance premiums and out-of-pocket expenditures, it should not increase the cost of health care to the South African with medical aid or society as a whole.

In the long term, by reducing administration and procurement expenses, the cost of health care should ultimately decline. Instead of confused and often unjust dictates of insurance companies, a greatly expanded programme of technological assessment and cost-effectiveness would guide decisions about covered services, as well as about the allocation of funds for capital spending, drug formularies and other issues.

Each hospital would receive an annual global budget to cover all operating expenses. For patients not using hospitals, the diversity of existing practice arrangements necessitates a pluralistic approach. To minimise disruption, the NHI would include three payment options for doctors and other practitioners: fee-for-service payments, salaried positions in the institutions receiving global budgets, and salaried positions within group practices receiving per capita (capitation) payments.

The NHI would not increase the burden of health costs on society in the short run, and should reduce the burden per person in the longer term. That has great importance for controlling the cost of living and of production. It would, however, lead to an apparent increase in the budget, equal to the amount now spent on private health care.

The structure and financing of the NHI is meant to be self-funding, as it will be raised as a levy. The funds raised through the levy would be ring-fenced, and used for medical care for all South Africans.

3.2.5 Treatment and prevention of HIV

Undoubtedly, HIV/AIDS forms on the most important daunting health problems facing South Africa, with the rate of infection currently estimated at around 25 per cent for adults. The budget must begin to ensure that people with HIV have adequate access to social security and treatment, and that condoms are available to all adults.

The epidemic also has a direct impact on the social security system, since most HIV-positive people require state assistance. Only a relatively small percentage of people living with HIV/AIDS have medical cover, retirement or unemployment support, and few benefit from existing social grants. People who live with AIDS often face discrimination from officials when trying to access government services like disability grants.

A number of existing grants can be targeted to support people living with HIV/AIDS, including child support, foster care and disability grants. Rather than establishing a separate grant for people living with HIV/AIDS, government should adopt a conscious strategy of directing existing grants to meet their needs.

A key element in combating HIV/AIDS is effective treatment strategies. Currently there are no effective strategies for treatment in the public sector. Debate has centred on the cost of drugs and the effectiveness of anti-retroviral medicines. Critical treatment strategies include obtaining cheaper medication; treatment for opportunistic diseases and STDs; use of anti-retroviral therapies including, but not restricted to, prevention of mother-to-child-transmission; and establishing a proper infrastructure for counselling.

It is also critical that government make condoms available on a broader basis. The current budget for condom provision suffices to provide around five condoms per adult South African a year. Yet many adults cannot afford to buy condoms from the private sector. Moreover, in remote rural areas they may not even be available for sale. It is clearly crucial that the government address the shortfall.

We here only consider the fiscal implications only of anti-retroviral treatment for HIV-positive people. The cheapest anti-retroviral treatment consists of AZT with some additions; they are not as effective as the top-of-the-line combination, but will still prolong people’s lives and health substantially. In Brazil, which has provided low-end generic anti-retrovirals on a large scale, deaths are down by half, and the rate of infection has dropped.

Obviously, the use of anti-retrovirals would involve researching affordable options. News reports currently suggest that use of Indian generic medicines could reduce the cost to between US $ 350 and US $ 600 a year – at the current exchange rate, between R230 and R400 a month, or rather less than the old-age pension.

If the infection rate is around 20 per cent of the adult population, at R500 a month it would cost around R6 billion a year to give the cheapest anti-retroviral treatment to 20 per cent of those infected – which is probably the number with symptoms at any given time. This is probably not a high enough rate of treatment to limit the spread of infection, but would go far to prolonging lives until a better treatment is found.

In addition, to provide every South African adult with two condoms a week will cost around R1 billion, at R1 per condom. That sum should also cover distribution costs.

In short, just providing retrovirals and condoms on a near-adequate scale would cost approximately R7 billion. If not offset by other savings, that would increase the current public health budget by around a third. In fact, however, the combination of improved health for HIV positive people and reduced spread should lead to savings in treatments for opportunistic diseases, training and productivity. Furthermore, the entire cost of the proposed HIV treatment need not come entirely from the budget.

We need much more research to assess the net impact of the proposed measures on the budget. It seems likely that it would be no more than R5,5 billion a year – probably an overestimate of the costs in the medium-term.

3.2.6 Skills development

Apartheid left South Africa with both lower skills levels than most economies at a similar level of productivity, and with highly inequitable access to qualifications based on race. Meanwhile, in the past decade, job losses have affected primarily unqualified work. In these circumstances, skills development - through both basic education and the provision of training and qualifications for adults - is crucial for employment creation, economic growth and equity.

Unfortunately, since 1996 the budget has not reflected this priority, as Table 6 indicates. Education is easily the largest vote on the budget, absorbing over a quarter of total spending. But between 1996 and 1999, in real terms it shrank by 3 per cent a year. The 2000 MTBPS projects only 0,8 per cent growth on average in the coming three years – well below the rate of growth in the population.

Since education is a provincial competency, it is heavily affected by provincial constraints and choices. The poorest provinces spend far less per learner – and also have a lower matric rate.

Table 6. Budget and expenditure per learner by province, 2000

The departments with the lowest budgets per learner also show a relatively high level of spending on personnel. This follows from the national strategy that stabilises learner-teacher ratios within a fairly narrow band. Interestingly, the worst-funded departments employ far fewer non-educators than the Western Cape and Gauteng – yet their low budgets still mean that non-personnel spending is squeezed.

Four main areas of under-resourcing have emerged in education, which current fiscal projections seem unable to address.

Historically African schools, particularly in the former homelands, typically never had clerical support, cleaners or security personnel. As a result, principals, teachers and learners end up carrying out these functions. The Statistics South Africa survey of child labour found that almost 10 per cent of South African children end up doing five hours or more maintenance work at school every week. Some 96 per cent of this group are African, and two thirds live in the rural areas. To equalise the ratio of teachers to support staff between provinces would require the creation of 30 000 unskilled and semi-skilled positions in the schools.

A second problem area lies in the lack of mathematics, science, culture and art teachers in historically African secondary schools. As the National General Council of the ANC pointed out in June 2000, these subjects are particularly important for employment and self-employment in the modern economy. The President listed information and communications technology and cultural industries as two of the growth sectors for the economy this year. Yet most historically African secondary schools still lack teachers for these subjects.

Third, historically African schools, particularly in the rural areas, still lack basic infrastructure. The following table indicates the situation according to the 1996 survey of school needs. Given the decline in education budgets, capital spending comes to only around 2 per cent – far to little to meet these backlogs.

Table 7. Infrastructure backlogs in the schools, 1996

The Department of Education is conducting a new School Register of Needs, which is scheduled for release this year. It will help in assessing the progress made in addressing infrastructure backlogs.

The final area of under-funding is Early Childhood Development (ECD) and Adult Basic Education and Training (ABET). These types of education are critical for overcoming the backlogs in education left by apartheid. Yet they lack both systematic programmes and funds. Without modification of the highly restrictive fiscal targets established under GEAR, they probably cannot be contemplated. In the words of the Department of Finance about ECD,

"While eventual returns to such an investment will be high, expenditure will have to compete with other mechanisms for improving quality in the schooling system. It will also place added pressure on provincial education budgets." (Department of Finance, 2000 Intergovernmental Fiscal Review, p. 35)

To deal with the budget shortfall, the education system has permitted schools to levy fees. This system contributes heavily to inequalities. On the one hand, schools in richer areas can charge more, letting them hire more staff and improve their equipment. On the other, poor children cannot afford the fees to these schools. Schools are supposed to take ability to pay into account – but that creates an incentive to avoid admitting poor children at all.

The skills development system established by the Skills Development Act was designed to extend training for adults. That is an especially important because apartheid deprived many adults of competencies and/or qualifications. The new system aims to provide qualifications for adults at all levels of training; to ensure that competencies are planned to meet sectoral needs, rather than being specific to one employer; and to ensure adequate funding of training through a 1-per-cent payroll levy.

When the skills development strategy was under debate, labour argued that the 1-per-cent payroll levy was low. In industrialised and rapidly industrialising countries, studies suggest that spending on training comes to around 4 per cent of payroll. The funding problems may be aggravated by the failure of many businesses to register to pay the levy. Furthermore, government departments only need to budget 1 per cent of payroll for training. There are no consistent mechanisms in place to ensure that they actually spend the funds on training.

The People’s Budget calls for spending on education, like the other components of the social wage, to increase at least 2 per cent above inflation.

3.2.7 Repositioning Infrastructure Spending

Infrastructure expansion remains key to a growth and development path in South Africa. The potential of infrastructure includes:

• Creating Assets for the Poor: A key lever for eradicating poverty and reducing income inequality is through the provision of viable and sustainable assets for the poor
   

• Lower transaction costs: Infrastructure lowers transaction costs by facilitating flows of information and goods, and interactions between markets
   

• Creating Economic Linkages: Infrastructure investment creates the potential for economic linkages. In particular, the ability to move goods makes investment viable
   

• Concentration of Economic Activity: The provision of infrastructure concentrates economic activity spatially, thus supporting backward and forward linkages
   

• Responding to change: Depending on the quality of infrastructure delivered, economies undergoing restructuring are able to respond to shocks, competitive pressures and value-added production

• Improving productive capacities: Access to infrastructure services could improve the capacities for producing goods and services in communities
   

• Creating wealth: Irrigation systems, transport routes and other infrastructure outcomes hold the potential for creating viable assets and markets
   

• Jobs: Infrastructure expansion creates jobs both during construction and for maintenance, and by supporting other economic activities in the long run.
   

• Boosting demand: Infrastructure expansion also boosts demand in the economy, thus supporting forward linkages. (Hassen E.K. and Horton C, 2000)

Consequently, there is wide agreement that infrastructure expansion is a correct path for government. Yet the budgets for key infrastructure programmes have been declining in real terms, as indicated in Table 4 above. The MTBPS projects an increase for infrastructure in the next three years – but it is still only enough to catch up with 1996 levels of spending around 2006.

To ensure that infrastructure meets developmental challenges requires repositioning of infrastructure programmes in several ways.

First, the current infrastructure programme is not aligned to a coherent trade and industrial strategy. The delivery of infrastructure should go beyond meeting basic needs alone to providing a basis for household economic activity. For example, delivering a communal standpipe or 8 amps of electricity does meet the requirements of a basic need.⁷ But it is too little to release productive capacities in poor communities by supporting business activity.

Second, the quality of housing spending requires particular focus. As a result of both a real decline in subsidies and poor planning systems, existing housing programmes perpetuate settlement far from urban centres and employment. That has, in turn been associated with:

• Higher transport costs for workers,
• Lower population densities, which makes it harder to provide government services and support economic activity,
• Falling building standards in extension projects, as private sector contractors cut corners, and
• A failure to locate and plan new settlements in ways that can crowd in other government investments.

Third, rapid implementation of the ANC’s commitment to provide a basic level of service free of cost will both boost the social wage and provide for redistribution. Currently, tariff structures for infrastructure have not supported cross-subsidies from the rich to the poor. As a result, poor communities have faced high bills and shut-offs for non-payment.

Implementing the commitment to free basic services requires important decisions about both budgets and administrative practices. Critical choices relate to the method and level of subsidisation. Above all, it is critical that municipalities in poor regions get national subsidies, since they cannot afford adequate services purely through internal cross-subsidisation.

Fourth, the maintenance of infrastructure is as important as new capital budgets. Table 8 below indicates the costs for rehabilitation of roads over time. The graph indicates that the costs of maintaining roads increase exponentially over time.

Table 8. Costs of road rehabilitation

The most recent calculations of maintenance costs for infrastructure delivery – which should be updated by government - point to a large gap between projected spending and required levels of spending to maintain infrastructure. (See Table 9) The question of investment must further be posed within the context of the call for accelerated service delivery. The financial commitment required to eradicate maintenance and rehabilitation backlogs in the provision of infrastructure has been estimated between R 47 billion and R53 billion in the next five to ten years. Under current medium-term allocations, a shortfall of over R10 billion will emerge.

Table 9. Backlogs in maintenance of public infrastructure

Finally, the problems identified with existing infrastructure programmes will be aggravated by strategies pushed by the national Department of Finance to encourage greater private investment in and competition around infrastructure provision. These strategies seem likely to limit the extension of quality infrastructure to the poor.

To compensate for the reduction in budgeted spending on infrastructure, the Department of Finance has demanded that local government and provincial departments shift to so-called public-private partnerships. Under this strategy, the private partner is expected to invest in infrastructure in return for a share in the revenues and/or subsidies. But the strategy is not viable for serving poor communities, where people simply cannot afford to pay the cost of infrastructure. Even if the government provides subsidies to the private partner, experience suggests that it frequently lacks the capacity needed to enforce agreements on service standards.

Fiscal concerns have also led the Department of Finance to push for partial privatisation of the state-owned enterprises that provide infrastructure, especially Telkom and Eskom. As part of this process, these parastatals will be made to compete with private providers. The argument is that this will compel them to become more efficient.

That belief ignores the deep-seated imperfections found in South African markets, and particularly the massive income inequalities. In these circumstances, demanding that state-owned enterprises compete will effectively compel them to focus on the profitable part of the market – supplying the rich and businesses – while scrimping on services to the poor. This shortcoming has been admitted by the Department of Public Enterprise’s own policy documents.

The Departments of Finance and Public Enterprises argue that they can overcome this problem through subsidies to provide for poor consumers. They support this approach on the grounds that it is more transparent than cross-subsidisation of poor customers by rich customers within parastatals.

Given fiscal constraints, however, this strategy seems likely to lead, ultimately, to reduced funding for infrastructure for the poor. Thus, the Department of Finance supported a law to tax Eskom, arguing that instead of using internal cross subsidies to fund electrification, it would provide an equivalent subsidy. In the event, in the coming budget it reportedly plans to give Eskom 40 per cent less than the corporation spent on electrification in 1999/2000.

The People’s Budget argues that expenditure on infrastructure should be increased substantially, as part of the overall social wage. Existing programmes should be reviewed to ensure they contribute as much as possible to both social and economic development.

Furthermore, the emphasis on public-private partnerships at local level, and the proposals for restructuring Telkom and Eskom should be revised to ensure that they will permit government to continue to meet its responsibilities, maintain services for historically underserved communities, provide sustainable security for workers, and fit into a coherent trade and industrial strategy.
 

Chapter 4: Translating Vision into Reality

This section of our proposals deals with

• methods to finance our proposals and
• a framework to improve the capacities of the public service to spend more effectively and efficaciously.

4.1 A developmental fiscal package

The developmental fiscal package that we propose consists of proposals to expand government’s resource base while making the overall tax burden more progressive. It also includes measures to redirect the funds available for spending on the social wage and economic infrastructure. The proposals are:

1. To increase the level of tax and deficits relative to the GDP,
2. To shift to a multi-rate VAT, with higher rates on luxuries and more zero-rated necessities,
3. To restructure the Government Employee Pension Fund (GEPF), and
4. To review the military procurement programme with a view to reducing it as far as possible.

4.1.1 Increasing the level of tax and deficits relative to GDP

The proposals made here, and in particular the increase in the social wage, requires an expansion in government spending. In the short run, that implies a moderate rise in the ratio of taxes and deficits beyond the targets provided in the MTBPS. In the longer run, as the economy begins to grow more robustly, the deficit and tax ratios will again decline.

EPRI has modelled the implications of this proposal for the People’s Budget. We here present three possible scenarios. All of them increase both taxes and government borrowing, as reflected by the increase in government revenue and the deficit as a percentage of the GDP. The resources raised through higher borrowing and taxes are channelled into productive social spending.

The results of these policies are summarised in the table below, and compared to the projections in the current MTBPS.

Table 10. Scenarios on deficit and tax targets