MACRO BUDGET SOUTH AFRICA 2017/2018 - South Africa - Unicef
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
South Africa
© UNICEF/Bart de Ruigh
MACRO BUDGET
SOUTH AFRICA
2017/2018
1
0.5 %
Real average annual rate
of decline of provincial
© UNICEF/Bart de Ruigh
government financing over
the MTEF
Preface
This budget brief is one of four that explore the extent to which compromising service delivery in the neediest communities;
the national budget and social services sector budgets address 2. Build capacity-enhanced planning, managing, monitoring,
the needs of children under 18 years in SOUTH AFRICA. The and execution in departments that serve children to spend
briefs analyse the size and composition of budget allocations for resources more effectively;
fiscal year 2017/18, as well as offer insights into the efficiency, 3. Avoid using spending performance as the only criterion for
effectiveness, equity and adequacy of past spending. Their main reducing departments’ baseline spending.
objectives are to synthesise complex budget information so that it
is easily understood by stakeholders and to present key messages Decentralisation and financing of subnational
to inform financial decision-making processes. governments: Provincial government financing is under
pressure and declining at a real average annual rate of 0.5 per
Key Messages and
cent over the MTEF. Programmes that service children appear
to absorb most of the cuts. The government is encouraged to:
1. Prioritise basic education, primary healthcare and social
Recommendations welfare services that support poor and vulnerable children
and their families;
2. Encourage provincial governments to build linkages with
tertiary educational institutions to maximise poor children’s
Aggregate spending trends and priorities: Lower tax
gains from the improved funding of universities;
revenues as a result of poor economic growth have reduced
3. Build capacity in provincial governments to spend all the
the speed at which the South African government is able to
available resources that have been set aside for the various
finance commitments outlined in the National Development
infrastructure grants;
Plan (NDP). Furthermore, departmental baseline spending is
4. Avoid aggressive cuts to frontline service delivery staff
being reduced over the Medium Term Expenditure Framework
in health, education, social welfare and public works
(MTEF). The government is encouraged to:
programmes that serve poor and vulnerable communities.
1. Protect programmes and services that benefit children without
© UNICEF/Hearfield
2
Sources of financing for the national budget: Public Developments in Public Finance Management
debt is set to rise from 51 per cent of the Gross Domestic (PFM):Implementing a revenue-sharing formula in a country
Product (GDP) in 2016/17 to 52.4 per cent of GDP in 2019/20. where provinces do not have the same fiscal capacity, or
In addition, debt service costs are projected to increase from where there is differential capacity within provinces to use
3.4 per cent in 2017/18 to 3.6 per cent at the end of the MTEF. resources effectively, makes it difficult to frame allocation
Given this scenario, the government is encouraged to: criteria that satisfy all relevant stakeholders. Nonetheless, the
1. Implement the much-discussed sugar tax and earmark these government is encouraged to:
revenues for programmes and services that benefit children; 1. Refine the indicators in the education component of the
2. Continue to pursue cost-cutting measures that do not affect provincial revenue-sharing formula to reflect the relative
services for children and vulnerable households; poverty of learners;
3. Reinforce the commitment to adhere to agreed-to spending 2. Adopt the principle that funding should follow the learner;
ceilings so that fiscal space is created for programmes and 3. Continue the conservative approach for revising the formula
services that benefit children. to avoid disrupting services for children at the provincial level.
© UNICEF/Hearfield
3
Section
1.
© UNICEF/Bart de Ruigh
Macro and Socio-
economic Context
The performance of the South African economy must be between the ages of 0 and 17 years and 51 per cent of children
viewed against the backdrop of persistent socio-economic are considered to be growing up in poor households.1 South
challenges that show no clear signs of being resolved. Africa’s Human Development Index (HDI) falls in the medium
Table 1 indicates that the real GDP growth is forecast to be 1.0 range and continues to be negatively impacted by stagnant HIV
per cent for the last financial year, while the unemployment prevalence rates and the poor quality of the basic education
rate remains high, at almost 27 per cent of the working-age system.
population. Furthermore, the price of food is increasing at a
faster rate than general price increases. Table 2: Social development trends in South Africa, 2011
to 20162
Table 1: Macro-economic trends in South Africa: 2015/16
to 2017/18 Key social development indicators
Key economic indicators Total population, 2016 55.2 million
GDP, 2016/17 ZAR4.4 trillion Total child population, 2016 (0–17 years) 18.6 million
GDP per capita, 2016 (ZAR) ZAR79,925 Children as a % of population, 2016 33.6%
Real GDP growth, 2016/17 1.0% Poverty rate, 2015 (Lower Bound Poverty 40.0%
Line)
Unemployment rate, 2016 26.5%
Child poverty rate, 2015 (Lower Bound 51.0%
Poverty Line)
Headline inflation, June 2017 5.1%
Human Development Index, 2015 0.67 (medium
Food inflation, June 2017 6.9% HDI ranking)
Expected years of schooling, 2015 (male) 12.5
Budget deficit, 2017/18 3.1%
Expected years of schooling, 2015 (female) 13.6
Taxation as a % of GDP, 2016/17 26.7%
HIV prevalence rates (overall) 12.6%
Debt service costs (interests) as a % of 3.4%
GDP, 2017/18
HIV prevalence rates, 15–49 years (women) 21.3%
Donor funding as a % of revenue, 0.8%
2015/16 HIV prevalence rates, 15–24 years (youth) 4.8%
Source: Budget Review and General Household Survey (GHS) 2016 (own
calculations) Life expectancy: male, 2015 55.5 years
The pessimism that marks the general economy is mirrored Life expectancy: female, 2015 59.5 years
in some of the socio-economic indicators displayed in Table
2. More than a third of the country’s population are children Sources: Statistics South Africa 2017 and GHS 2016 (official reports); UNDP 2016
4
The performance of the South African economy can best Over the entire period represented in the graph below, the
be described as sluggish as evidenced by the low real economy was unable to breach the 3 per cent growth mark.
GDP growth rate over the last six years. To put economic Given the challenges, it is admirable that the headline inflation
growth into perspective, the country’s National Development rate was kept within the targeted 3–6% band. Tax revenue as
Plan (2011) estimated that the economy needed to grow at an a percentage of GDP consistently increases from about 25% of
average rate of 5 per cent per annum until 2030, to address GDP to a forecast 27.2% of GDP at the end of the present MTEF
structural challenges such as unemployment and inequality. cycle.
Figure 1: Performance of the South African economy, 2013/14 to 2019/20 (%)
2013/14 Outcome 24.8 Tax revenue as a % of GDP
5.8
2.3
Headline Inflation (%)
2014/15 Outcome 25.5
5.6
1.8 Real GDP growth (%)
2015/16 Outcome 26.2
5.2
0.6
2016/17 26.0
Revised estimate 6.4
1.0
2017/18 MTEF 26.7
6.3
1.3
2018/19 MTEF 27.0
5.7
2.1
2019/20 MTEF 27.2
5.6
2.3
Percentage 0 5 10 15 20 25 30
Source: Budget Review 2017
The severe drought curtailed the contribution of agriculture 2017). Table 3 shows that the largest contributor to economic
to the country’s GDP in 2016, but the government has growth and job creation was the services sector, as can be seen
predicted better returns for this sector because of rains in the manner in which the growth rates across these sectors
returning to some part of the country (Budget Review, mirror the overall GDP growth rate during the past three years.
Table 3: Real sector growth trends compared to GDP growth, 2011 to 2016
2011 2012 2013 2014 2015 2016
Agriculture, forestry and fishing 2.0 1.8 3.6 6.9 -5.9 -7.0
Mining and quarrying -0.7 -2.9 4.0 -1.4 3.2 -4.1
Manufacturing 3.0 2.1 0.8 0.1 -0.3 0.7
Electricity and water 1.5 -0.4 -0.6 -1.3 -1.0 -2.9
Construction 0.4 2.6 4.6 3.6 2.0 1.4
Wholesale and retail trade 4.1 4.0 1.9 1.4 1.4 1.1
Transport and communication 3.5 2.4 2.8 3.1 1.4 -0.1
Finance, real estate and business services 4.3 3.0 2.5 2.4 2.8 2.1
Personal services 2.5 2.1 2.2 1.7 1.1 1.1
General government 4.7 3.0 2.9 2.7 0.7 1.7
GDP 3.3 2.2 2.3 1.6 1.3 0.4
Source: Budget Review 2017
5
The main instruments that affect planning in government • Rapid economic growth and job creation;
are the National Development Plan (NDP), which sets • Rural development, land and agrarian reform and food
out long-term planning goals for various facets of social security;
and economic life in South Africa and the Medium- • Ensuring access to adequate human settlements and quality
Term Strategic Framework (MTSF), 3 which serves to basic services;
domesticate the electoral mandate of the governing party. • Improving the quality of and expanding access to education
The most recent MTSF (2014–2019) is the first of its kind to and training;
directly engage with the NDP and attempts to ensure greater • Ensuring quality health care and social security for all citizens;
alignment between the goals of the NDP and the priorities that • Fighting corruption and crime.
guide budget planning and implementation. Some of the key
MTSF goals that have a direct bearing on the government’s The Annual Reports of departments include reporting on the
budget are: performance of most of the adopted indicators.
© UNICEF/Hearfield
Takeaways:
• The below-par economic growth has reduced the benefit children.
speed at which the South African government is able • A shrinking resources base will require a combination
to finance commitments outlined in the NDP and the of cost-savings and the strategic prioritisation of
MTSF. spending commitments.
• Given that the low growth scenario is projected to be • Government departments that serve children will
unchanged over the present MTEF, serious questions be under pressure to spend their existing resources
are raised about the ability of the government to effectively to avoid any changes to their baseline
protect spending on programmes and services that spending plans.
6
Section
2.
Aggregate Spending
© UNICEF/Bart de Ruigh
Trends and Priorities
Size of Spending per cent in 2015/16, which was more than a percentage point
Consolidated government expenditure and proposed higher than prior years. However, with planned reductions over
allocations constitute between 27–28 per cent of GDP departments’ baseline spending plans, allocations are predicted
over recent and projected years (Figure 2). For instance, to constitute less than 28 per cent of GDP at the end of the
government spending as a share of the economy totalled 29 MTEF in 2019/20.
Figure 2: Consolidated government expenditure and allocations as a % of the Gross Domestic Product (GDP),
2013/14 to 2019/20
2013/14 Outcome 27.4
2014/15 Outcome 27.6
2015/16 Outcome 28.9
2016/17
Revised estimate 28.0
2017/18 MTEF 27.9
2018/19 MTEF 27.7
2019/20 MTEF 27.8
Percentage of GDP 26.5 27.0 27.5 28.0 28.5 29.0
Source: Budget Review 2017
Spending Changes
The gap between nominal and real government spending than 2 per cent over the present MTEF and has maintained a
(and allocations) remains largely unchanged over the same similar trajectory over the past six years (Figure 3). Given the
period, suggesting a relatively predictable inflationary government’s commitment to curtail departmental spending, it is
environment that should strengthen budget credibility. highly likely that the growth in allocations at the end of the MTEF
Consolidated government spending is projected to grow by less will be much smaller than the projected 2.5 per cent.
7
Figure 3: Annual growth in consolidated government expenditure and allocation, 2013/14 to 2019/20 (2016/17=100)
12 Nominal
10.8
10 Real
Annual percentage change
7.2 7.5 8.3
8
7.1 5.4
6
4 4.7
2.5
2
1.4 1.7
0 -1.5 0.8
-2
2014/15 2015/16 2016/17 2017/18 2018/19 2019/20
Outcome Outcome Revised MTEF MTEF MTEF
estimate
Source: Budget Review 2017
Spending and Allocation Priorities in the Consolidated Government Budget
Non-interest expenditure (exclusive of debt servicing costs) proposed allocations to basic education and health are projected
is projected to grow from R1.2 trillion in 2016/17 to R1.5 to remain stagnant over the MTEF. Smaller functions, such as the
trillion at the end of the present MTEF, at a real average Housing and Amenities function, however, are projected to have
annual rate of 1.7 per cent. Figure 4 shows that spending real average annual increases in line with the overall government
and proposed allocations to the Social Development function average. It should be abundantly clear that South African
takes precedence over the present MTEF as measured in terms departments operate in a restrained spending environment. Given
of its real average annual growth rate (1.8%), which is slightly the limited economic growth mentioned earlier, some of these
above that of consolidated government expenditure (1.7%). The proposed allocations might actually be revised downward.
Figure
Fig 4
4: Consolidated government expenditure and allocation by function, 2015/16, 2017/18 and 2019/20 (ZAR billion)
1,200
2015/16 Outcome
1,323
South Africa
1,540
135 2019/20 MTEF
Housing and community 151
amenities 174 2017/18 MTEF
45
Defence 48
53
122
Public order and safety 137
156
158
Health 182
207
152
Social Development 179
206
202
230
Education
257
0 200 400 600 800 1,000 1,200 1,400 1,600 1,800
Source: Budget Review 2017 and Provincial Estimates of Revenue and Expenditure 2017
The resolve of the South African government to adhere the same when new estimates were presented in October
to spending ceilings is demonstrated by consistently 2015 via the MTBPS 2015 (0.3% difference) and a full year later
delivering spending outcomes in line with those set in in February 2016 via the 2016 Budget Review when the 2015
budget documents (Figure 5). For example, in 2015/16, ceiling only differed by 0.4 per cent.
estimates that were presented in February 2015 were virtually
8
Figure 5: Adherence to expenditure ceilings, 2014/15 and 2015/16
99.5 2014/15
2015 MTBPS 99.7
99.5 2015/16
2016 Budget Review
99.6
2016 MTBPS
99.4
2017 Budget Review
99.4
99.0 99.2 99.4 99.6 99.8 100.0
Source: Budget Review 2017 (own calculations)
Recurrent and Capital Spending and Allocations in the Consolidated Government Budget
Spending and allocations on compensation remain around of total government resources in 2017/18, while in 2019/20, that
37 per cent of the total budget, which is the largest expense. share is projected to grow to 2.5 per cent. Spending pressures
The OECD (2017) 4 estimates that wages constitute about 14 per are felt in the acquisition of capital assets, whose shares of total
cent of South Africa’s GDP compared to other middle-income government expenditure dropped from 4.6 per cent in 2013/14 to
countries where the average share of wages is between 4 and 12 4.1 per cent in 2017/18 and fell to only 3.7 per cent at the end of
per cent. Transfers to households come in at around 18 per cent the present MTEF. Figure 6 represents the spending intentions
of total government spending, and the bulk of these transfers of government as it tries to protect the real value of social grants,
is on social grants. Given the centrality of spending on tertiary as well as extending coverage and responding to the financing
institutions, transfers to universities alone consumed 2.4 per cent pressures that emanated in the university sector.
Figure 6: Expenditure and allocation by type in the consolidated government budget, 2013/14 to 2019/20 (%)
37.3
37.5
37.6
37.0
37.3
40
36.3
Percentage of consolidated
expenditure/allocation
35
30
25
18.2
18.2
18.1
17.9
17.5
17.3
17.5
20
15
10
4.8
4.6
4.6
4.1
4.1
3.9
3.7
3.7
2.5
2.4
2.2
2.3
2.3
2.3
2.5
2.2
2.3
2.3
2.2
2.3
2.4
2.4
5
0
2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20
Outcome Outcome Outcome Revised estimate MTEF MTEF MTEF
Compensation Transfer to households Transfers to universities Transfers to NPOs Payment for capital assets
Source: Budget Review 2017
Takeaways:
• A critical feature of the present MTEF is the downward government employees absorb whatever fiscal space is
revisions to departmental baselines. The information available.
presented thus far suggests that further spending cuts • Overall, most departments are operating in a constrained
are now inevitable. spending environment and unless the economy starts
• Given the government’s commitment to maintain the growing again, sharp intra-departmental and inter-sectoral
real value of key social grants, the Social Development trade-offs will become the norm over the next few years.
function performs better than Education in attracting • There is evidence that the spending proposals for the
additional resources. 2017 MTEF are virtually cast in stone and that the MTEF
• In addition to elevated social development spending, represents the government’s actual spending stance and
transfers to universities and spending on wages of commitments.
9
Section
3.
Decentralisation and
© UNICEF/Hearfield
Subnational Spending
Decentralisation Context and Subnational Funding Guidelines
The Constitution of the Republic of South Africa grants In terms of the financing of provincial governments, Section
equal status to the three spheres of government in South 214 (a-c) of the Constitution5 makes provision for three different
Africa and promotes an overall principle of interdependent sources, namely a vertical division of revenue (among the three
governance (Constitution of Republic of South Africa, spheres of government), a horizontal division of revenue (using a
1997). Furthermore, the Constitution (Chapter 6) spells out the formula to divide resources among provinces), and through special
legislative authority of provinces via the provincial legislatures allocations (conditional grants that have strict conditions for their
and Schedule 4 provides for functional areas of concurrent use). The vertical division of revenue is decided politically, while
national and provincial legislative competence. the horizontal process relies on a funding formula based on relative
need (demographic data). The provincial equitable shares (PES)
formula contains six components with different weights.
Table 4: Distributing the equitable shares by provinces, 2017
Education Basic share Economic Institutional Weighted
Health (27%) Poverty (3%)
(48%) (16%) activity (1.0%) (5%) average
Eastern Cape 15.1% 13.5% 12.6% 16.3% 7.6% 11.1% 14.0%
Free State 5.3% 5.3% 5.1% 5.2% 5.0% 11.1% 5.6%
Gauteng 18.0% 21.8% 24.1% 17.3% 34.3% 11.1% 19.8%
KwaZulu-Natal 22.3% 21.7% 19.8% 22.2% 16.1% 11.1% 21.1%
Limpopo 13.0% 10.3% 10.4% 13.6% 7.1% 11.1% 11.7%
Mpumalanga 8.4% 7.3% 7.7% 9.1% 7.5% 11.1% 8.1%
Northern Cape 2.3% 2.1% 2.1% 2.2% 2.1% 11.1% 2.7%
North West 6.5% 6.7% 6.8% 8.0% 6.5% 11.1% 6.9%
Western Cape 9.1% 11.3% 11.3% 6.1% 13.6% 11.1% 10.1%
Total 100% 100% 100% 100% 100% 100% 100%
Source: Budget Review 2017
Note: Green represents the highest value, while red represents the lowest value for each component and the total weighted share by province.
10Box 1
Let’s imagine how this formula works in practice. If R100 billion was available to be spent on provinces, then the
Eastern Cape provincial government should receive 14% of R100 billion (or R14 billion). Almost half of this money (48%)
would have been decided using the education component. That means of the R48 billion decided through the education
component, the Eastern Cape government would have received 15.1% of R48 billion (or R7.2 billion). For the health
component, the Eastern Cape is entitled to 13.5% of the R27 billion (or R3.6 billion). The formula assumes that the cost
of running government is the same for all provinces and the Eastern Cape will receive 11.1% of R11.1 billion (or R1.2
billion). The same calculation is made for all the components; these are tallied and the final shares will be paid over in
quarterly instalments during the financial year.
Provincial Spending and Allocation Trends, 2015/16 to 2019/20
Provincial spending grew from R487 billion in 2015/16 to with the exception of the present financial year, where the extent
an expected R618 billion in 2019/20, which amounts to a of funding decline is much larger for the Gauteng, Limpopo and
real average annual growth rate of -0.5 per cent (Figure 7). Northern Cape provincial governments. In 2017/18, consolidated
This is generally not good news for children, as some of the key provincial spending is planned to decline by almost 2 per cent,
services for children are funded and delivered at the provincial while the next financial year (2018/19) merely moderates the
level. The provincial annual growth curves are bunched together, extent of the decline in financing provincial governments (-0.2%).
Figure 7: Real annual growth rates in subnational expenditure and allocations, 2015/16 to 2019/20
8 Eastern Cape
Free State
Real annual change (percentage)
6
Gauteng
4 2017/18 2018/19 2019/20 KwaZulu-NaTal
Limpopo
2
Mapumalanga
0 Northern Cape
North West
-2
Western Cape
-4 South Africa
2016/17
-6
Source: Provincial Revenue and Estimates of Expenditure 2017
Spending Disparities by Provincial Government is only 20.9 per cent, while the corresponding numbers for
The Limpopo and KwaZulu-Natal provinces have a smaller Limpopo are 11.7 per cent (weighted shares) and 11.1 per cent
share of total provincial spending than would be predicted (equitable shares plus own revenue) (Figure 8). The Gauteng and
by their weighted equitable shares, suggesting lower Mpumalanga provinces have more or less the same weighted
capacity to leverage own funding than other provinces. and total provincial allocation shares, while total allocations for
For example, KwaZulu-Natal receives 21.1 per cent of national the remaining provinces are higher than their corresponding
transfers through the equitable share formula, but its share of shares of the transfers made available by the national
total provincial allocations (equitable shares plus own revenue) government to provinces.
11Figure 8: Comparing actual allocations by provincial governments to their weighted shares of national transfers in
2017/18 (%)
Western Cape 10.1 PES, 2017/18
10.8
North West 6.9 2017/18 MTEF
7.1
Northern Cape 2.7
2.9
Mpumalanga 8.1
8.1
Limpopo 11.7
11.1
KwaZulu-Natal 21.1
20.9
Gauteng 19.8
19.7
Free State 5.6
6.0
Eastern Cape 14.0
13.5
Percentage 0 5 10 15 20 25
Source: Provincial Revenue and Estimates of Expenditure 2017 and Budget Review 2017
Adjusting total provincial spending for the child population, national per-child spending was R26,000 and three provinces,
the Northern Cape (smallest population overall) has the namely the Eastern Cape, Kwazulu-Natal and Limpopo spent
largest spending per child over these two years, while below the national average. In 2016/17, the national per-child
Limpopo and the Eastern Cape have the lowest per-child spending was R28,000 and the same three provinces, with the
spending in 2015/16 and 2016/17 respectively. In 2015/16, the addition of Mpumalanga, spent below the national average.
Figure 9: Per-child spending by provincial governments in 2015/16 and 2016/17 (ZAR)
40,000
Per-child spending by province (ZAR)
35,000
38,663
36,205
35,295
30,000
33,231
29,383
29,018
29,296
25,000
28,495
27,049
27,483
26,534
27,186
26,195
26,205
27,062
26,283
25,684
25,225
24,651
20,000
24,091
15,000
10,000
5,000
0
ca
pe
e
ng
l
po
ga
pe
t
pe
ta
es
at
ri
Ca
te
Na
po
an
Ca
Ca
W
St
Af
u
Lim
al
u-
n
Ga
n
rn
ee
rth
h
m
er
er
ul
te
ut
Fr
pu
No
st
rth
aZ
es
So
Ea
M
Kw
No
W
2015/16 Outcome 2016/17 Revised estimate
Source: Provincial Revenue and GHS 2015 and 2016 (own calculations)
Note: Children between the ages of 0 and 17 years.
Takeaways:
• Provincial government expenditure is under severe allocations.
strain and is only projected to recover at the end of the • Two of the traditionally poor provinces, KwaZulu-Natal
present MTEF. and Limpopo, have a lower share of total provincial
• Provincial spending and allocations grew from R487 allocations in 2017/18, which is at odds with their higher
billion in 2015/16 to R618 billion in 2019/20 at a real overall share of national transfers.
average annual rate of -0.5 per cent. • When total provincial spending is adjusted for the size of
• The largest adjustment in allocations is made in the the child population, the Northern Cape has the largest
present financial year (2017/18) where provincial per-child spending in 2015/16 and 2016/17, while the
budgets lose close to 2 per cent in real value, while the Eastern Cape, KwaZulu-Natal, and Limpopo spent below
next financial year merely moderates the real losses in the national averages in both years.
12Section
4.
Financing the
© UNICEF/Pawelczyk
National Budget
Domestic Revenue requirement increases from 15.8 per cent in 2017/18 to 17.7 per
To off-set the negative impact of lower economic growth cent at the end of the present MTEF. Furthermore, debt service
on the country’s revenue position, tax revenue (mostly costs, as a percentage of the GDP, are projected to increase
personal income tax) is set to rise from 26.2 per cent in from 3.4 per cent in 2017/18 to 3.6 per cent in 2019/20. The
2015/16 to 27.2 per cent of GDP at the end of the present government argues that a combination of consistent reductions
MTEF (Figure 10). Consolidated domestic revenue is projected of departmental baseline spending and higher taxes will narrow
to achieve a surplus over consolidated non-interest expenditure the consolidated budget deficit from 3.4 per cent of GDP in
in 2017/18 and 2019/20, while the country’s gross borrowing 2016/17 to 2.6 per cent in 2019/20.
Figure 10: Government expenditure financing, 2015/16 to 2019/20
100
Government expenditure financing,
103.1
103.8
2015/16 to 2019/20 (percentage)
101.5
100.4
99.5
90
80
70
60
50
40
28.4
29.4
29.8
29.9
26.7
27.0
27.2
26.2
27.8
26.0
30
18.8
15.8
17.7
16.3
15.0
20
3.4
3.5
3.6
3.2
3.3
10
0
Domestic revenue Tax revenue as Debt service costs Domestic revenue Gross borrowing
as a % of GDP a % of GDP as a % of GDP as a % of total requirement as a %
expenditure of total expenditure
2015/16 Outcome 2016/17 Revised estimate 2017/18 MTEF
2018/19 MTEF 2019/20 MTEF
Source: Budget Review 2017
Note: Percentages are indicated for 2017/18 and 2019/20 only.
Borrowing
Total government debt is set to increase from 49.4 per cent in developing country contexts (Figure 11). Around 10 per
in 2015/16 to 52.4 per cent in 2019/20 and the OECD latest cent of the government’s debt portfolio consists of international
review notes that the country is fast approaching the upper loans, while long-term domestic debt makes up 78 per cent of
limit of 40–55% debt-to-GDP ratio considered prudent total government debt.
13Figure 11: Public debt as a percentage of GDP, 2015/16 to
2019/20
54
52.9
53 52.4
52.3
52
Percentage of GDP
51 50.7
50 49.4
49
48
47
2015/16 2016/17 2017/18 2018/19 2019/20
Source: Budget Review 2017
The costs of servicing (the country’s rising) debt increased
© UNICEF/Schermbrucker
from R129 billion (or 3.2% of GDP) in 2015/16 to more than
R197 billion (or 3.6% of GDP) at the end of the present
MTEF. As can be seen from Figure 12, the largest debt servicing
costs are on domestic loans, while a much smaller part of the
costs involve servicing interests on international loans.
Figure 12: Rising costs of servicing public debt, 2015/16 to 2019/20 (ZAR billion)
197
2019/20 MTEF 18
180
181
2018/19 MTEF 16
164
162
2017/18 MTEF 14
148
146
2016/17 Revised estimate 11
135
129
2015/16 Outcome 10
118
ZAR billion 0 20 40 60 80 100 120 140 160 180 200
Total Foreign loans Domestic loans
Source: Budget Review 2017
14Additional Financing Options savings to be channelled to priority expenditures for
A UNICEF-commissioned study into fiscal space in South children because of the government’s other stated
Africa6 has highlighted several issues. Some of the salient priorities. These include: funding higher education;
findings include: (i) Levying taxes on the consumption of luxury contributing to the New BRICS Development Bank;
goods and introducing the much-discussed sugar tax could increasing the contingency reserve fund for small business
lead to a sizeable amount of new revenue that could be used development; strengthening government’s planning,
to finance programmes and services that benefit children; (ii) monitoring and evaluation capacity; and decreasing the
Building on the ongoing efforts to achieve cost-savings, such country’s debt levels. At a minimum, the fiscal space study
as reducing unnecessary travel, curbing the use of external notes that priority sectors (for children) need to show that
consultants and generally decreasing spending on non-priority they are managing their funds well and maximizing the
areas that have a poor spending record. effectiveness of their current budgets, which is the starting
• At the same time, it is unrealistic to expect all additional point for receiving more resources.
© UNICEF/Pirozzi
Takeaways:
• In order to fill the void left by lower revenues, the wastefulness, focus on priority spending for children and
government is set to increase taxes (especially personal improve the quality of spending.
income tax) to close the revenue gap. • Public debt is set to rise from 51 per cent of GDP in
• Tax revenue (mostly personal income tax) is set to rise 2016/17 to 52.4 per cent in 2019/20, which is indicative
from 26.2 per cent in 2015/16 to 27.2 per cent of GDP at of the financial pressures the government is under to
the end of the present MTEF. deliver vital services.
• The fact that domestic revenues are still able to finance • With an increase in public debt, the cost of servicing
non-interest expenditure is encouraging and this in itself government debt is expected to increase from 3.2 per
provides a powerful incentive for government to rein in cent in 2015/16 to 3.6 per cent in 2019/20.
15Section
5.
New Developments
© UNICEF/Hearfield
in PFM
PFM Challenges in South Africa The Challenge of Providing Resources to
The main challenge is that during a time when targeted Provincial Governments on an Equitable Footing
spending on the poor should be accelerated, the economy Because more than 80 per cent of provincial governments’
is underperforming, thus depriving the budget of much- revenue are allocated through the equitable share formula,
needed resources to tackle the country’s formidable it is imperative to understand whether this formula
social and economic problems. This is best summed up can be improved to better serve the needs of the most
when examining the reductions to the baseline budgets of all marginalised people in South Africa.
three spheres of government. Table 5 shows that provincial
governments are required to surrender almost R1.8 billion in The introduction of the Social Security Agency (SASSA)
2017/18, of which the bulk of the reductions are taken from the removed the need to retain the social development
various conditional grants. A much smaller amount (between component, while infrastructure backlogs are now funded
R500 and R550 million) will be deducted from the unconditional through a conditional grant. Weights for the remaining
block grant, which to some extent preserves the small fiscal components were adjusted to reflect expenditure patterns at the
space that provinces have at their disposal. One can surmise provincial level.
that variable spending rates on the conditional grants might have
prompted a more conservative implementation of conditional Table 6: Comparing the original and existing PES formula
grant funding. (weights are in brackets)
Old PES formula PES formula in use (introduced
Table 5: Baseline reductions by sphere of government,
(introduced in 1996) since 2004)
2017/18 to 2019/20 (ZAR million)
Education (41%) Education (48%)
2017/18 2018/19 2019/20
National government 3,910 2,297 2,770 Health (19%) Health (27%)
Compensation of employees 437 471 497
Social development (18%) Component was removed
Goods and services 649 667 787
Transfers to public entities 2,850 1,240 1,539 Economic activity (7%) Economic activity (1%)
Other national spending 411 390 444 Backlog (3%) Component was removed
items
Provincial government 1,757 1,882 1,955 Basic share (7%) Basic share (16%)
Provincial equitable share 500 529 558 Institutional (5%) Institutional (5%)
Provincial conditional grants 1,257 1,353 1,397
Poverty (3%)
Local government 791 813 837
Local government 791 813 837
conditional grants
Source: Budget Review 2017
16© UNICEF/Hearfield
Implementing a revenue-sharing allocation formula in of the leading civil society advocacy groups, makes a strong
a country where provinces do not have the same fiscal case for the incorporation of an explicit rural and poverty
capacity or where there is differential capacity within element in the education formula of the provincial equitable
provinces to use resources in the best possible way, share. Using Statistics South Africa’s demarcation of geographic
makes it difficult to frame allocation criteria that satisfy all types, Equal Education computes population weighted school-
relevant stakeholders. Rao and Khumalo (2004) 8 argued that age distributions that account for ‘rurality’ and consequently
any allocation formula needs to consider cost factors that are ‘allocates’ substantially more resources to rural provinces
beyond the immediate control of provincial governments. The (Eastern Cape, KwaZulu-Natal and Limpopo) and takes away
Financial and Fiscal Commission (FFC) (2000) took this process resources from the more urban provinces (Gauteng and the
one step further when it called for a ‘costed norms’ approach, Western Cape).
which requires the government to define an output standard
for a service (65% pass rate in school-leaving examinations) It is understandable that the National Treasury has taken
and then estimate the resources needed to achieve that a cautious approach to reviewing parts of the allocation
goal.9 The intention was to apply this approach to all services formula because of the disruptive effect this may have on
that are constitutionally required to be delivered by provincial provincial revenue. This approach is likely to be continued and
governments. we should not expect large swings in provincial revenue either
way. However, what is clear is that the allocation formula needs
The FFC (2014 and 2017)10 made further submissions on to change so that it provides an improved understanding of what
the allocation formula and argued that if the formula were it means to deliver services to poor and vulnerable communities.
to be revised in the long term, a conditional block grant The education formula needs to find a balance between
for education and health should be provided to ensure recognising that rural areas have implicit cost factors that increase
that provinces meet their constitutional obligations with financing costs, while recognising that urbanisation trends are
regard to these key services. Equal Education (2017),11 one irreversible and urban poverty is as real as rural poverty.
Takeaways:
• Reductions in the baseline funding for provinces that requirements to deliver basic services to poor and
were motivated by poor spending at the subnational vulnerable individuals should be factored into such
level should be complemented with capacity-building decisions.
interventions aimed at improving the effectiveness of • Mooted changes to the education component in the
spending. allocation formula should consider poverty and other
• Furthermore, reductions should not be based only factors of need, but changes need to be negotiated with
on poor spending performance, but constitutional all relevant stakeholders.
17Key Events
in the
Budget
Calendar
National budget process
July 2016: National agencies submit their first draft budgets to the National Treasury
September 2016: MTEC process concludes: Recommendations tabled to MINCOMBUD
October 2016: Tabling of Medium Term Budget Policy Statement
October 2016: Preliminary allocation letters issued to departments
November 2016: Submission of draft 2017 national budget chapter and database by
departments/entities
November 2016: Cabinet approved final allocations distributed to departments
February 2017: Budget tabled in Parliament.
Provincial budget process
July 2016: Technical Committee on Finance Lekgotla
August 2016: Provincial treasuries submit first draft 2017 Budgets to National Treasury:
Estimates of Provincial Revenue and Expenditure and database
September 2016: Budget Council and Budget Forum meeting (inter-governmental meeting)
October 2016: Tabling of Medium Term Budget Policy Statement
October 2016: Preliminary allocation letters issued to provinces – equitable share and
conditional grant allocations
December 2016: Final conditional grant frameworks and allocations submitted to National
Treasury by national departments
End Jan/Early Final allocation letters issued to provinces
Feb 2017:
End Feb/Early Provincial 2017 Budgets tabled at provincial legislatures.
March 2017:
18Endnotes
1 The poverty measure used to determine that 51 per cent of 5 Legally, these constitutional provisions find expression in the
children are poor is the lower bound poverty line (which is annual Division of Revenue Bill/Act that accompanies the
ZAR647 per person per month). The number would be much main budget documentation at the start of the new financial
higher if the upper bound poverty line (ZAR992 per person cycle. The Division of Revenue Bill/Act is particularly helpful
per month) is used. in listing in detail the conditions under which (conditional)
2 Data for the textbox were drawn from the United Nations grant funding should be used, including reporting require-
Development Programme (UNDP), Human Development ments and the duration or life-span of the grant.
Report 2016: Human Development for Everyone. New York, 6 UNICEF, National political economy analysis and fiscal space
UNDP, 2016 [accessed 15 August 2017]. space analysis-South Africa. Rotterdam, UNICEF, 2017.
Poverty data were drawn from Statistics South Africa, Pov- 7 Rao, MG and Khumalo, B. Sharing the Cake: A Review of the
erty trends in South Africa: an examination of absolute pov- Provincial Equitable Share Formula in South Africa: [accessed 09 August 2017].
of the General Household Survey 2016. HIV prevalence rates 8 The Financial and Fiscal Commission (FFC). A costed norms
were drawn from Statistics South Africa, Mid-year population approach for the Division of Revenue. Midrand, FFC.
estimates 2017. Pretoria, Government Printers, 2017. 9 The Financial and Fiscal Commission (FFC), Submission for
3 The MTSF report was downloaded from: [accessed sion for the 2010/11 Division of Revenue.
18 July 2017]; The Presidency, The National Development 10 Equal Education (EE). Adjusting the equitable share formula
Plan 2030: Our future – make it work. Pretoria, Government to improve opportunities for equal education across rural and
Printers, 2011. urban areas. Cape Town, Equal Education.
4 OECD, OECD Economic Surveys South Africa. Paris, OCED
Publishing, 2017.
© UNICEF/Schermbrucker
19United Nations Children’s Fund Equity House 659 Pienaar Street Brooklyn Pretoria 0181 www.unicef.org/southafrica
You can also read
