COSATU Submission on
Intergovernmental Fiscal Review
Presented to the Select Committee on Finance, 12 October 1999
Table of Contents
COSATU welcomes the opportunity afforded us by the Select Committee on Finance to make a submission on the Intergovernmental Fiscal Review ("the Review"). We will not be commenting on the Review on a chapter-by-chapter basis, but will speak to certain themes relevant to the Review.
COSATU welcomes the publication of the Review. This together with the National Expenditure Survey, marks an improvement in budget accountability and transparency. The data provided in the Review will also be useful to organs of broader society in facilitating participation in development processes. We also appreciate the commitments made in the Foreword to the Review to include financial data from local government and to shift towards a more results-oriented budgeting system in future.
The Review notes several "good budgetary practice" measures which have been put in place. These include regular reporting, better financial management, and better planning. COSATU supports these steps, and the commitment to tighten up wastage, corruption, and sub-optimal spending of scarce resources.
We do, however, have a number of concerns about the Review, primarily arising from its conceptual approach. In broad terms, the Review both reflects and promotes the notion of "fiscal discipline" shaping and limiting socio-economic delivery. We believe that it will be difficult if not impossible for government to implement its mandate of "accelerating change", as envisaged by President Mbeki in his opening speech to parliament, in the context of the fiscal approach reflected in the Review. The following section summarises our key concerns with the Review.
- Summary of COSATU concerns
Our major over-arching concern on the Review is that it elevates fiscal discipline to be an untouchable principle, and to be the criterion by which the performance of provinces is to be judged. This displaces delivery on developmental mandates as the central performance indicator for provincial governments.
Both through the "judgements" of the Review and through the Department of Finance "rewarding" (through additional funds) provinces which set aside "finance reserves" for repayment of debt owed by them, inappropriate incentives are set up which encourage savings rather than delivery. This has led to the perverse situation of a number of provinces turning in surpluses despite massive socio-economic backlogs.
It is in fact conservative macroeconomic parameters which are giving rise to the squeeze on budgets at provincial as well as other levels. The meeting of abstract budget deficits has supplanted to addressing real social deficits.
COSATU is concerned about falling capital expenditure. We do not, however, accept that current expenditure or personnel expenditure is responsible for squeezing capital expenditure. This is a function of the particular combination of fixed and variable items of income and expenditure.
Our proposals are listed in Section 10 of this document ("Way Forward").
- COSATU’s position on the budget process
The Constitution (at s77) requires the enactment of legislation which will empower parliament to amend money bills, such as the budget, rather than just accept or reject them. Without such legislation the participation of parliament in respect of money bills is rendered fairly meaningless. Participation in processes on money bills also becomes a futile exercise for organs of broader society, as no changes can be effect to the bills under discussion. It is for this reason that COSATU has not made formal submissions to parliamentary budget hearings for the last three years, although we have publicly released our analysis of and position on the budget every year.
COSATU calls on the Select Committee on Finance, together with the Portfolio Committee on Finance, to ensure the urgent tabling of an adequate Money Bills Amendment Procedure Bill. The Finance Committee has in the past expressed support for such legislation, and were not satisfied with a draft tabled previously by the Department of Finance. The spirit and letter of the Constitution reflects that an important aspect of South Africa’s democracy is the transformation of the highly secretive and centralised process inherited from the apartheid regime into a more open and participatory process.
COSATU thus welcomes the acknowledgement in the Review that
Wider involvement by political office-bearers remains one of the key challenges facing provincial budget-making. Inadequate political participation in the budget process weakens the governments ability to set priorities and pursue its goals through the budget…Reforms in the budget process are unlikely to yield the desired results without wider political involvement.
We look forward to the translation of this commitment into concrete steps for the democratisation of the budgetary process, and the fulfillment of the Constitutional mandate for the tabling of a Money Bills Amendment Procedure Bill.
- The overall logic of the Review
COSATU finds the underlying logic of the Review highly problematic. This logic elevates cost efficiency to an overarching principle, judging the fiscal success of provinces as being directly proportional to money saved. This logic is premised on the notion that squeezing resources will automatically lead to efficient governance, with the effects on delivery either deemed irrelevant, or assumed to flow from this greater "efficiency". We thus find a bizarre scenario of provinces being congratulated for not spending their full allocations while in the very same provinces healthcare is in a serious condition, education is in a state of "crisis"1, and huge backlogs remain in almost all spheres of delivery. The thinking in this report is indicative of an ideological approach consistently advanced by the Department of Finance which subordinates the meeting of social needs to the meeting of abstract fiscal targets.
COSATU recognises that there is considerable inefficiency at various levels of the public sector, and that South Africa can ill-afford wastage of badly needed resources. In this light we strongly support any attempt to stamp out corruption, correct misallocations of personnel and other resources, and encourage efficient spending of public funds. The benchmark for such efficiency should be outcomes: to what extent does every Rand of public expenditure assist in the short, medium and long terms in advancing the goals of the RDP?
Where provincial deficits have been reduced or turned into surpluses, the source of this change needs to be interrogated: is it due to greater efficiency in using given resources to meet basic needs? Or is it due to reduced service delivery to the poor, either through poor provincial spending capacity or through a deliberate cost-cutting approach? There is little cause for celebrating surpluses if they arise through either of the latter. The review gives insufficient information and analysis on the real reasons for reductions in deficits or deficits being transformed into surpluses.
We believe that a macro-overview such as the Intergovernmental Fiscal Review should be supplemented by micro-level analysis of the impact of policies at the delivery coal-face. This would be likely to reveal unfilled or frozen posts, deterioration of infrastructure, and a lack of resources such as medicines and school textbooks.
An initiative such as the Intergovernmental Fiscal Review could potentially play an important role in assessing the extent to which provinces are meeting transformation priorities, and encouraging improvements where there are shortcomings. We are, however, concerned about this Review and other initiatives setting inappropriate goals and "incentives’ for both elected representatives and civil servants at provincial level. A situation should be avoided where, in an effort to gain a positive judgement in the Review, provincial governments either postpone or scale down delivery in pursuit of balancing their books or even reporting a surplus. The focus should rather shift to outcomes-based motivations and targets towards which provinces should strive.
This also raises the question of accountability. COSATU is concerned about the danger of elevating the Department of Finance to a "super-department" to which other national departments as well as provinces must answer, with the effective power to veto expenditure which may interfere with the meeting of arbitrary targets. Provinces need to be accountable to the citizens of South Africa. Whilst we acknowledge the important role of the Department in terms of ensuring overall fiscal prudence, this becomes problematic if it amounts to a veto power over developmental plans.
One mechanism for effecting this accountability is through greater participation and decision-making power of the elected representatives of these citizens.
- Macroeconomic parameters
Macroeconomic policy can either aid or retard development to the extent that it maximises or constrains resources available to implement programmes. GEAR’s privileging of fiscal rectitude among others, has produced a perverse planning paradigm. Developmental objectives have been supplanted by the subsidiary objective of reducing the government deficit. The level of the deficit is arbitrary and is not informed by South Africa’s development needs. This means that the budget drives plans rather than the other way round. Development plans have to fit within the deficit reduction programme rather than plans driving the budget.
Even if provinces had spent all their allocated resources, it is clear that these would not have been sufficient to meet basic needs. This points to the inadequacy of the existing spending base, and of expenditure targets as set in the government’s macroeconomic framework. COSATU reiterates its position for a review of these targets and of the entire GEAR strategy. Of particular relevance here would be increasing the revenue:GDP ratio and relaxing deficit targets2. A motivation for debt financing for capital expenditure is well articulated by the Review:
Borrowing enables a government to finance the initial cost immediately but to budget repayment over time as benefits from the investment are derived. Spreading the burden of the investment ensures that current taxpayers do not fund the entire cost of a project that will render benefits to future generations. Debt financing also allows a government to undertake more projects, and sooner, than would have been possible from tax revenue alone3.
- Capital and current expenditure
An argument has been made by some commentators that it is the public sector wage bill, or current expenditure more broadly, which is responsible for "squeezing" capital spending. This premise leads to a policy prescription of containing the public sector wage bill in order to "free up resources" for capital expenditure. This is an argument which COSATU would like to tackle head on.
Provinces are often faced with the difficult situation of having fixed allocations from national government, little flexibility in raising their own revenue, and much of their current expenditure fixed at a national level. In their attempts to "balance the books", they may well be forced to effect an adjustment in the budget items which are the most "flexible". This leads to the perverse squeezing of capital expenditure, not by current expenditure per se but by the particular combination of fixed and variable items of income and expenditure. It is thus disingenuous to single out personnel expenditure as the "culprit" to be blamed for insufficient capital expenditure and non-personnel current expenditure.
The education and health sectors in particular are highly labour intensive, and as such personnel expenditure is not purely a cost but rather an investment. Furthermore, the building of strong public sector institutions will require an adequate mix of motivated staff, who have the required tools to teach or provide health care. The so-called "trade-off" between current and capital expenditure thus really skirts the question of how do we build a better public service. As COSATU has pointed out in past, schools cannot teach and clinics cannot heal people – it is the public servants themselves who are at the frontline of delivery. For example, the Presidential Education Initiative Report identifies one of the central problems in schools as being excessively high pupil:teacher ratio’s, and that this problem is worst in black schools in poor communities. This situation would be exacerbated by trying to reduce education personnel costs.
Increases in expenditure on personnel have in fact been modest, although personnel expenditure has indeed increased somewhat as a proportion of the total budget. The chief explanation for this situation is the squeeze on the budget as a whole.
The "right size" for the public service is a dynamic concept which needs to be outcome based - it needs to be assessed in terms of state successes and failures in sectors that can be attributed to personnel size and functions. An appropriate conception of "rightsizing" was captured in the April 1996 agreement between unions and the state, which also reflected the approaches of the RDP and the White Paper on Public Service Transformation. The definition of rightsizing in the agreement read as follows:
A concerted effort to determine on a programme by programme basis the minimum number of staff which would be adequate to deliver a particular programme, having regard to declared policy and priorities.
Given that the public service as a whole has decreased by 13.3% since 19944, and that massive backlogs remain, it is doubtful whether much further space for downsizing remains5. This is confirmed by the recent audit commissioned by government, which even indicated the need for additional personnel in certain areas. The marching of social needs with personnel skills remains the only scientific basis for determining the "right size" of the public service.
- Collective bargaining
The inadequate alignment of budgeting and bargaining systems was one of the fundamental sources of the current dispute in the public service. The inadequacy was clearly seen, when the ‘final’ offer from the state was announced in parliament during the 1999 / 2000 budget speech rather than in the collective bargaining chamber. This announcement by Minister Trevor Manuel had significant implications for labour relations not only for the public service, but also for all workplaces in South Africa. Firstly, one of the purposes of collective bargaining is to ensure that employers do not take unilateral decisions and that negotiations are conducted in good faith. The budget announcement however rendered the collective bargaining systems marginal and irrelevant. This strained relationships between the state and public sector unions.
Secondly, the announcement attempted to render organised labour as a spectator on issues that directly affected their members. Differently stated, the public sector unions did not have the space to negotiate, in good faith, with the employer. The employer in using parliament to announce its final offer, closed the space for meaningful dialogue and negotiations as envisaged in the Labour Relations Act.
Needless, to say had a more sensible alignment between the budget and collective bargaining process been agreed to, better labour relations would be possible. Specifically, we propose the completion of the collective bargaining cycle before the draft budget is submitted to Cabinet. This relates to the broader question of the relationship between plans, budgets, and personnel. COSATU believes in a logical sequencing of identifying needs, drawing up plans to meet these needs, assessing the personnel required to implement the plans, and calculating the budget needed to finance this personnel and the plans in their entirety – cognisant of course of responsible spending limits.
COSATU notes with concern suggestions of a shift towards devolved collective bargaining in the public service. We would be completely opposed to this as it would undermine centralised bargaining. It would also hinder the closing of public service wage gaps and would probably increase interprovincial inequalities. It would also have a destabilising effect on the public service as a whole and would be a highly inefficient way of conducting collective bargaining.
- Fiscal relations between national and provincial governments
Provinces are provided allocations primarily through two mechanisms:
- Block Grants: This consists of the "equitable share" for provinces. This is calculated according to the FFC formula.
- Conditional Grants: This consists of the finances for specific national priorities. In the last few years this has focussed on capital investment and introducing efficiency saving mechanisms.
The block grants have a strong redistributive function. The formula for instance has a bias towards children at school, poorer people using the public health system and to address backlogs. The block grants however have two policy issues that require further understanding:
- Discretion of Provinces: Due to the provinces being "distinctive, interdependent and interrelated sphere" of government, the provinces have some discretion in directing spending. This discretion is however limited by the province fulfilling its commitments for welfare payments, and recurrent costs (e.g. rental and salaries). As such, despite the redistributive thrust of the formula, the implementation of formula in the context of a fiscal squeeze is probably mitigating against this.
- Changes in the Formula: The Department of Finance has indicated that the formula is open for review on a year-on-year basis6. The extent and nature of the changes in the formula are not immediately clear. COSATU requests information from the Department of Finance on how this will proceed and the opportunities for participation in the process.
The conditional grants play a crucial role in the national government using financial leverage to achieve national objectives. The grants have the following advantages:
- The grants are used for a specific purpose, and cannot be "swallowed" into the running of the administration;
- The grants have the potential to improve performance, and the monitoring thereof
- The use of grants could also increase accountability as they are based on detailed business plans.
The national government as the recipient of most taxes, is in a strong position vis-à-vis the provinces. Simply stated, the national government has a tax base through which it can direct investment and shape development choices. The provinces, on the other hand, are reliant on national funding. The impact of this is that policies can be directed from a national level. This "asymmetrical" relationship is not problematic in itself, and is in fact important in ensuring that national government is capacitated to drive a common transformation programme.
This leverage can also, however, be used to encourage inappropriate policy choices, of which the Review provides an example. An agreement between the provincial MEC’s for Finance and the Minister of Finance stipulated that the provinces would receive an additional R 1-billion over and above their budget allocations, on condition that they set aside "finance reserves" for repayment of debt owed by the provinces. The provinces responded by budgeting R7,1 billion in surpluses (finance reserves). This can be seen as a response to the perverse incentives set up by the Department of Finance which effectively reward provinces for cutting back on delivery and prioritising savings and debt repayment to national government.
There is a danger of provinces feeling or becoming accountable the Department of Finance, rather than prioritising their development mandates. This can lead to a bias in prioritisation – where there is a trade-off between satisfying the Department of Finance or needs on the ground (to put the choice in crude terms), the structural fiscal arrangements tend to favour the latter. While we recognise that fiscal responsibility must be ensured at all levels and spheres of government, this responsibility must be subsidiary to developmental objectives as opposed to becoming the primary objective itself. What is imperative is that the leverage of national government be deployed to ensure that provinces do indeed meet RDP priorities.
The problem of "unfunded mandates" has been extensively discussed from various angles. It is generally taken to refer to responsibilities imposed on provinces by the national government, but without adequate resources to carry these responsibilities out. The consequences of this problem have been dire, for example in terms of the well publicised case of pension payments in the Eastern Cape. This situation can be seen as arising from a combination of fiscal austerity and poor planning.
One point which emerges strongly from all sections of the Review is the stark interprovincial inequalities. Whether it be in terms of expenditure on textbooks per learner, health expenditure per capita, or a range of other criteria, certain provinces have consistently lower levels than others. The historical roots of this are also apparent, with provinces which had to incorporate several Bantustan administrations (three and four in the cases of the Eastern Cape and Northern Province respectively).
While all provinces have had their expenditure squeezed, the effect has been greatest on the poorest provinces. According to the IDASA Review of Provincial Budgets, poor provinces have generally spent progressively less on:
- Capital projects
- Tourism and economic development
- Non-personnel expenditure in education (books, stationary etc.)
- Non-personnel expenditure in health (medicine, medical supplies, catering service etc.)
- Non-social security expenditure in welfare (children’s and old age homes etc.)
There have been several moves in the apparent direction of greater fiscal federalism. COSATU is concerned about this trend and its possible effects on hindering comprehensive, uniform transformation. The increasing devolution of taxing and spending discretion to provinces is likely to lead to greater unevenness amongst provincial approaches and could exacerbate existing interprovincial disparities.
Notwithstanding the need for some flexibility to accommodate provincial specificities, COSATU believes in the need for transformation priorities to be driven through from the national level, with these priorities informing appropriate budget allocations. Any policies related to intergovernmental fiscal relations or provincial finances need to be consciously geared towards the closing of these interprovincial inequalities. The current inequalities are destabilising even for the wealthy provinces by causing trends such as interprovincial migration.
- Infrastructure development
Adequate government spending on infrastructural development is crucial not only for the meeting of current basic needs but also for long term economic development. Capital expenditure can have significant positive "multiplier effects". It has the potential to stimulate local demand and to boost local growth through realising forward and backward linkages to a host of other sectors. Public capital expenditure can "crowd in" private expenditure by providing suitable infrastructure and boosting economic activity. It can also be used as leverage by the state for shaping economies in targeted areas and sectors. Capital spending, properly managed, is thus a true investment in building a prosperous economy. Increasing capital expenditure is/was one of the key pillars of the GEAR strategy, but this was not realised in actual budget allocations. This has been a function of the cuts in expenditure driven by the tight deficit:GDP targets.
A failure to maintain and upgrade infrastructure in the current period will also be more costly in the long run. For example, once roads reach a certain point of degradation the costs of repairing them rise exponentially as compared to what the initial cost of maintaining them could have been.
In this context we are particularly concerned about the falling capital expenditure reflected in the Review. An example of this is expenditure on transport, roads, and public works - so crucial for integrated economic development. 1996 to 1999 saw a 24% fall in real expenditure on these items across all provinces. Of particular concern is the fact that in provinces such as the Eastern Cape and Northern Province, which are most in need of development, the cuts were especially high – by 40% and 31% respectively7.
Looking at aggregate capital expenditure as a proportion of provincial budgets, this has almost halved from 1996 / 7 to 1999 / 00, falling from 8.67% to 4.65%8. Although this has fallen for every one of the provinces, the cuts tend to be sharpest in provinces most in need of economic development. Although conditional grants have propped up capital expenditure to a limited extent, planned capital expenditure within the equitable shares is set to fall further over the medium term. Conditional grants mostly protect capital spending within the social service budgets, and not capital spending within areas such as transport or agriculture.
- Way forward
COSATU would like to table the following principles and proposals on the issue of intergovernmental fiscal relations and provincial finances.
Insofar as macroeconomic targets constrain delivery, they need to be urgently reviewed. Of particular relevance here are the deficit:GDP and revenue:GDP targets.
The Medium Term Expenditure Framework needs to be reworked from scratch on the basis of more appropriate macroeconomic parameters and in a more transparent and participatory manner.
The entire budgetary process needs to be democratised. Both at national and provincial levels, the space for parliament in particular as well as NEDLAC and broader society to meaningfully participate in the budget process needs to be increased9.
Programmes should inform budgets. The growing consensus across the developing world is that planning frameworks should guide budgets. This ensures that the strategic objectives of governments are reached. Within this, there is a recognition that some limits will always be present. The shift in emphasis from reaching fiscal targets to linking plans to budgets ensures that outputs can be measured. We propose that the next Intergovernmental Fiscal Review should start by attempting to quantify the remaining social backlogs, calculating the resources needed to meet these backlogs, and from there develop short, medium, and long term strategies for financing the eventual elimination of backlogs.
Policies and expenditures should be judged by their outcomes. The establishment of transparent and meaningful performance measures to test organisational results and evaluate impacts are central to improving coverage, quality, efficiency, and productivity. Equally, it provides for assessment of the sustainability of state action. One aspect of this is better data collection and analysis of the impact of expenditure on the meeting of people’s needs. This implies that provincial governments require better information systems to assess service delivery. This information should disaggregate data according to race, gender, spatial and other categories so that delivery can be assessed in the context of apartheid legacies. This could be a useful guide to future government activity.
The focus of future Intergovernmental Fiscal Reviews should shift from praising provinces which either balance their books or underspend, to prioritising the meeting of basic needs. The promotion of good budgetary practice and the elimination of wastage and corruption should also be encouraged.
Collective Bargaining must remain a national government competency. Government has suggested increased decentralisation of the collective bargaining process. It is extremely improbable that administrative and other capacity exists at provincial level for handling this. Decentralisation would fragment the collective bargaining process and make transformation more uneven. It could also be destabilising for the public service in causing some interprovincial migration of workers. Instead the provinces must develop the capacity to engage effectively in the national process.
National, Provincial and Local Spending should be better integrated to maximise outputs in a co-ordinated way. Clustering of investment in an area is central to sustainable and integrated development.
We welcome the commitment from the Department of Finance to include data from local government level in future Reviews. For our analysis and proposals on local government financial systems, please refer to our submissions on the Discussion Document on Local Government, and the Municipal Systems Bill.
Appendix: Seventh Interim Report of the Commission of Inquiry into certain Aspects of the Tax Structure of South Africa
COSATU did not make a submission at the Select Committee hearings on the above issue as we have not yet had a chance to study the detail of the proposals. We would like, however, to put forward the following principles with which we feel any proposals on provincial taxation should be compatible:
Any new taxes should be progressive at an interpersonal level. We feel that the lower and middle classes already bear a heavy taxation burden relative to high income groups, and that restructuring of the tax system is required such that it is not only regressive overall but that every component of the system is progressive. COSATU would thus be completely opposed to the introduction of any new regressive taxes or to changes which make the system as a whole any less progressive/more regressive.
Any changes contemplated should shift the tax burden away from individuals towards companies. Various COSATU submissions have documented the shift, initiated under apartheid and aggravated since 1994, which lets the corporate sector get away with paying a diminishing share of total revenue and passes the burden on to individuals. Any new taxes should be on the corporate sector.
As stated in this submission, COSATU is concerned about the high levels of interprovincial inequality. It has been acknowledged by the FFC and other structures involved in this process that all the taxes being contemplated, and of particular importance the surcharge on personal income tax, are regressive in the sense of being likely to deepen the gulf between the wealthier and poorer provinces. COSATU recommends that policies need to be geared at closing this gap.
Similarly, we would support proposals aimed at eliminating tax avoidance and evasion and at closing the gaps between nominal and effective company taxation. We note the concern voiced by SARS that a surcharge on personal income tax would open up great potential for tax avoidance, for example through trusts and closed corporations; and consider this to be a serious demotivation against the surcharge.
We would be opposed to moves to increase provinces’ taxation powers if these moves were likely to foster a situation of "downward competition", in which provinces attempt to out-bargain each other in reducing tax rates in order to attract business or wealthy individuals to their jurisdictions. Increased fiscal federalism can out in place counter-productive incentives to provinces which could erode the total national revenue.
The entire debate around the proposals of the Katz Commission has been framed by the ceiling of a revenue:GDP ratio of 25%. As COSATU has stated consistently, including in this submission, this ratio is inappropriate for a developing country facing high socio-economic backlogs, and is an unnecessary obstacle to redistribution and delivery. As part of an overall review of macroeconomic policy, we feel that this target needs to be upwardly revised. We also recommend that, instead of a fixed target, a flexible band be aimed at which is can adjust to meet spending targets in the context of variable growth rates.
In the words of the Minister of Education.
COSATU has noted with concern recent reports that the surplus SASRIA funds are to be used to reduce government debt. COSATU had tabled a proposal at the Presidential Job Summit that these resources be used for job creation projects and programmes. Particularly in the light of the ongoing job losses, we do not accept that debt reduction is the top priority for expenditure at the moment. We thus propose that the deployment of the SASRIA funds be put on hold until consultation with labour and business, where we will recommend their use primarily in job creation and other development programmes.
Intergovernmental Fiscal Review p2.9.
Department of Public Service and Administration (1998) "Exchequer Report"
In one example of the police service, the number of policemen and women has fallen by 8.6% over the period 1995 to 1998(Source: Department of Finance (1998) "MTEF Integrated Justice Sector Report")
Medium Term Policy Statement 1998
IDASA (1999) "A Review of Provincial Budgets 1996/7 - 1999/000"
The three labour federations (COSATU, NACTU, and FEDUSA) will shortly be tabling proposals in the Public Finance and Monetary Policy Chamber of NEDLAC on overall budget reform, focusing on increasing the meaningful participation of parliament, NEDLAC, and civil society in the budget process