Draft Case study
Background
The Budget we table in this Parliament today bears testimony to the fact that as a nation we dared to dream. That through our tormented past we kept the dream alive. We understood then as we do now that the fruits of progress come slowly, one harvest a little richer than the last. Our great thought was freedom, our dream a better life for all. We dreamt that and we have the courage to make it real[1].
Trevor A. Manuel, MP
Minister of Finance
Plagued with vast inequality of income and power, the end of apartheid created a climate for change that included calls for an overhaul of public services. In response to these appeals, the South African government’s goal has been to enhance the lives of its citizens by promoting policies that are geared towards increasing economic stability, employment and growth. Part of this transition has meant reforms to budget processes.
South Africa has a history of incremental budgeting and did not attempt considerable reform until the mid-1990s. The approach to incremental budgeting meant that percentage increases in the budget were made annually without giving much thought to long-term priorities[2]. Moreover, activities were rarely reviewed to determine their value and to remove an activity from the annual budget was virtually impossible. This decreased the probability of resources being allocated to the highest priorities and constituted a significant block to substantive policy changes and program redirection. That said, "marginal adjustments" could be made but this inevitably prevented longer-term developments necessary for substantial growth. When the government faced demands to change its budgeting processes (as in 1994) the government did not have the mechanisms whereby policy could be adjusted and public sector activities redirected.
With the election of a new democratic government in 1994 and the unveiling of a new Constitution, the country was not only faced with vital policy reprioritisation, but it also had to deal with serious fiscal uncertainty. From a policy perspective, the nation’s Reconstruction and Development Program (RDP), introduced in 1994 by the ANC-led government, was both a new and ambitious venture. In the 1994 document entitled, The Reconstruction Development Programme: A Policy Framework, the RDP is described as "…an integrated, coherent socio-economic policy framework. It seeks to mobilise all our people and our country's resources toward the final eradication of apartheid and the building of a democratic, non-racial and non-sexist future."[3] A broad range of social development and economic transformation goals flowed from the RDP, such as the redistribution of land to the landless, electrifying 2.5 million homes, building one million new homes and providing clean water and sanitation to all.[4] Projects such as these had demanding expenditure implications attached which the RDP did not consider. These implications had to be accommodated within a sound macroeconomic and fiscal framework, consistent with the division of responsibilities between national, provincial and local government. Hence, an accommodating program, GEAR (The Growth, Employment and Redistribution Strategy), was introduced in 1995 in order to create a financial framework for the RDP and to improve the disparate macroeconomic conditions in South Africa. GEAR was a fiscally conservative, rigid, deficit reduction program.
GEAR’s conservative slant was indicative of the government’s acknowledgement that all of its socio-economic goals could not be achieved immediately. GEAR has resulted in strict budget allocations that have tended to drive national policy agendas. While being unpopular in certain sectors, it has also championed significant public sector reforms. In particular, GEAR proposed a medium term plan for rebuilding the economy, with the general theory being that constraints on available resources and the capacity to deliver goods and services limited government expenditure in the short term. Further budgeting changes were introduced in 1998 in the form of the medium term expenditure framework (MTEF), the purpose of which has been to allow individual government departments to plan policy changes typically three years in advance. This was the second introduction of the MTEF, the initial introduction in 1994 having failed. The MTEF bridges the technical preparation of budgets with the need to reflect political priorities in expenditure plans.[5] It is designed to empower the nation as a whole to determine priorities collectively.[6] Furthermore, the MTEF should bring departmental projects, national objectives, and budgets into line. South Africa’s Budget Reform and Medium Term Fiscal Policy Statement explains that the key features of the MTEF are that it:
· promotes publication of three-year estimates when the Budget is tabled in Parliament;
· focuses on outputs and outcomes of government spending programmes as part of the budget review process;
· offers a co-operative approach to expenditure analysis and planning, involving national and provincial treasuries and spending departments;
· provides more detailed budget information to promote understanding and debate in Parliament and civil society; and
· aims at informed political responsibility for budget priorities and spending plans.
In theory, each year’s budget provides the baseline estimates for planning expenditures for the following year. When engaged in the budget process, reviews of the past and current year’s expenditures and policy reforms can be reflected through adjustments to the baseline spending plan. Furthermore, because the medium term nature of the new framework provides greater clarity regarding departmental allocations in the future, the MTEF enables departments to “plan and reprioritise with greater certainty about future resource allocations than in the past. It also provides Parliament and civil society with clear signals of Government’s spending intentions.”[7] .
The kind of reform embodied in the MTEF is internationally recognized as a good practice. The MTEF improves various aspects of the budget process and policymaking, such that future financial implication of development policies and programs are conveyed early on in the process; policy and program tradeoffs are easier to evaluate because they are highlighted; spending agencies are better able to plan for the future; cabinet is able to evaluate policy options and set expenditure priorities more effectively; and it reduces the need for rollovers and promotes reprioritization.[8]
Given these goals, the new Framework has been adopted with the expectation that it will assist government to overcome the main weaknesses of the previous incremental approach, which included the lack of performance monitoring, weak accountability chains, poorly defined goals, and perverse incentives arising from penalties to departments whose annual spending fell below budget. It was (and is) also hoped that the MTEF will empower policymakers to allocate scarce budgetary resources to competing programmes in a way that enables policy change, improved performance in terms of policy implementation and improved financial management, leading to a stronger fiscal position.
Issue 1: What sequence was used in your country, and what does the sequence tell us about the most effective and expeditious path to reform? Do the lessons derived from your country’s experience enable us to draw any lessons on the appropriate sequence of budget reforms?
The MTEF in South Africa, linked with GEAR, stretches over a medium term period. This facilitates a certain amount of sequencing. In the years between 1996 and 1999, there have been substantial, though slowly paced, developments through and around the MTEF initiative (these include policy developments in the area of personnel, infrastructure, health and education). The MTEF is a concept that encourages a longer term view of policy development, focusing on three- year projections of revenues and expenditures by forecasting growth, inflation, and debt service costs, among others. This framework requires government to make hard choices in the allocation of funds including a provision for policy and contingency reserves, between various tiers of government, as well as by departments. As such, the MTEF has been a vehicle for identifying policy options, enhancing predictability, building capacity, and promoting transparency.
During South Africa’s first attempt at an MTEF budget reform, between 1994 and 1996, the central government required each department to fill in a spreadsheet template to formulate the budget. This sectoral analysis, comprised of cross-sectoral links, was essentially a very large, technically perfect spreadsheet model, but failed to consider the other components necessary for successful reform in government. Some reasons behind the MTEF's limited success in directing the budgeting process towards its desired goals and objectives were, (1) political buy-in, particularly from members of Cabinet, was lacking; (2) the MTEF had no link to the budget or to the budget process; (3) the budget process failed to emphasize choice; and (4) the process of developing the spreadsheet was too technical. As such, the MTEF attempt failed and quickly faded out.
Following this experience, a new MTEF emerged in 1998 and this version has proved more resilient and effective, prompting the question "why?" To begin with, the adoption of the MTEF established departmental commitment to the Cabinet to publish three-year plans to be made publicly available early on in the budgetary process. This indicated new levels of buy-in and created lines of responsibility. When the MTEF was introduced, the Ministry of Finance agreed that initially, budgets would be calculated in detail for the larger departments and budget estimates for the smaller line agencies would be prepared in order to publish the budget on time during the first year of the MTEF. It was determined that the Treasury Department would continue to refine the estimated expenditures throughout the budget cycle. In order to determine accurate budgets for all departments, employees from the Treasury Department met with all line agencies to determine budget breakdowns, indicating that greater concern was placed on enhancing budgetary capacity and responsibility than in the first MTEF. A crucial element of the second MTEF was that it entirely replaced the budget process. The MTEF was not regarded as a budgeting intervention piloted for a limited number of departments within the South African government, but was the only budget process available throughout the whole of government, nationally and provincially. This was essential for the credibility of the MTEF because in order to concertedly allocate resources to the line ministries and work through the initial complications, government departments needed to be involved and represented in a single budget process.[9]
In support of the MTEF, the government has begun conducting annual reviews of sectors beginning with the 1998 budget program. In 1998, the Department of Finance performed reviews in the areas of education, health, welfare and social security, infrastructure investment, integrated justice sector, and personnel spending. These reviews assess the work that has been accomplished, as well as make recommendations for future development in these sectors. For example, the Ministry of Finance agrees that it must support and strengthen infrastructure investment over the medium term. Areas such as energy, communications, transport and social infrastructure enhance the lives of many poor and improve the performance of the economy. The box below illustrates an assessment of infrastructure investment in South Africa.
The MTEF appears to be advancing with broad agreement on how reforms should be achieved, and it is regarded as a platform for reprioritisation of spending in line with RDP objectives. Moreover, the need for a more transparent and participative budget process emerges as a clear theme among those in government. There is agreement about the importance of well planned public spending, particularly in infrastructure investment and there is consensus about the need to reprioritise spending to direct services towards the poor.
The South African government realizes that rolling budgets may necessitate adjustments, especially in the beginning. As promised, in its second year of three-year budget forecasts, the 1999 National Expenditure Survey, a survey of spending in each sector conducted annually in South Africa, has published revisions to the budget expenditure estimates since 1998. A downward adjustment to the overall expenditure level is needed as a result of lower economic growth than originally anticipated. This adjustment has been reflected primarily in the national share in 1999/00. The following changes relative to the 1998 medium term estimates took place:
· Adjustments have been made to national and provincial allocations for a reduction in the employer's contribution to pension funds from 17 per cent to 15 per cent, reflected in the 1998 budget framework as a recovery from pension funds.
· Provision for debt interest costs has been increased relative to the 1998 Budget projections, reflecting higher borrowing costs than anticipated in 1998/99.
· Contingency reserve allocations have been revised downwards.
· Provision is now made for the introduction of a skills development levy-grant scheme in 2000/01, to be financed through a payroll-based levy on employers.
· The estimates now include projected spending to be financed through grants received in terms of international co-operation agreements.
· The local government’s equitable share has been reduced in 1999/00 to accommodate continued provincial expenditure on municipal functions in several towns.[10]
Adjustments such as these were expected to arise especially in the initial years of the new budgeting framework. Yet even so, it appears that political support for MTEF will not wane from the first democratic government to the second in South Africa. There is a general acceptance of the three-year time line for budgeting and the policies that have been patiently devised still enjoy support. The rapidity of these reforms is still unclear, however that said, South Africa, after only eleven months of MTEF implementation, is experiencing significant reform throughout government. As the single, government-wide budget process in South Africa, continued efforts to iron out any wrinkles in the reforms should be reflected in the National Expenditure Survey and the Medium Term Budget Policy Statement.
Issue 2: How has budget reform proceeded in your country: Independently, or with strong links to other management improvements? If the latter, how have these links been forged, and have they contributed to or impeded reform?
Issue 3: In your case, was reform implemented piecemeal, or across the board, in a short time compass, or over an extended period? Were these deliberate choices of government, or just the manner in which opportunities arose? Did the path taken significantly impact the success or failure of the reforms?
The Medium Term Expenditure Framework was designed to link with public sector management efforts as well as with a broader swathe of macroeconomic reforms in the country. As previously mentioned, the MTEF has strong ties to the Growth, Employment and Redistribution Strategy (GEAR) and the Reconstruction and Development Framework (RDF). GEAR's focus on reprioritizing to reduce debt is complemented by the MTEF’s process of methodically and comprehensively expresses policy shifts by using a more rational and responsible approach to financial management. Furthermore, the RDP’s call for policy redirection is taken up in the MTEF's concentration on program choice in a more stable decision-making environment. These measures as they relate to one another essentially try to link reform throughout government to the Macroeconomic Strategy (GEAR) and to the objectives of government (as in the RDP and other documents).