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Budget analyses of sub-national government in South Africa 2010: 16th March 2010


Budget analyses of sub-national government in South Africa 2010: 16th March 2010 Financial and Fiscal Commission * Overview of Presentation Introduction Definitions ... – PowerPoint PPT presentation

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Title: Budget analyses of sub-national government in South Africa 2010: 16th March 2010

Budget analyses of sub-national government in
South Africa 2010 16th March 2010
  • Financial and Fiscal Commission

Overview of Presentation
  1. Introduction
  2. Definitions and indicators
  3. Budget process and outputs
  4. Situational analysis
  5. Medium term trends and budget analysis for
    provinces 2010
  6. Medium term trends and budget analysis for
    municipalities 2010
  7. Conclusions and Way forward

1- Introduction What does budget analysis
  • With financial data available
  • Review of past trends which affect future budget
    needs and policy priorities
  • Budget summaries and examinations of
    completeness, accuracy and conformance with
    regulations especially expenditure control
  • Estimation of resources required or available for
    programs, legislation and projects
  • Testifying before examining and fund granting
  • With non-financial data available
  • Undertaking unit (beneficiary) cost and benefit
  • Estimating value for money (efficiency,
    effectiveness), equity of allocations, rate of
    backlog reduction.

1- Introduction FFC Budget Analysis Unit
  • Objective
  • To assist national and provincial legislatures to
    understand, review and suggest amendments to
    short- and medium-term budgets
  • Philosophy
  • Budget legibility and transparency for
    accountable institutions
  • Nature of recommendations
  • Report formats, non-financial data required,
    link to policy priorities and strategic plans,
    institutional capacity, transmission mechanisms

2- Definitions and indicators Medium to long
  • Medium-term one to three years long-term -
    three to seven years
  • Data sources National Treasury for ENE (Mar
    2010,11,12), PBER (Aug 2011), LBER (Aug 2010),
    MTBPS (Nov) and BR (Mar) other national
  • Compare three-year past trends against three-year
    budget forecasts for revenue, spending and
  • Performance indicators derived from Constitution,
    Chapter 13, Section 214 (2) a-j e.g. national
    interest, needs and obligations service delivery
    obligations, fiscal capacity, efficiency of and
    disparities between provinces and municipalities
    stability versus flexibility.

2- Definitions and indicators Short term IYM
  • Short-term less than one year, involves in-year
    monitoring or IYM
  • Data sources National Treasury for Sec 32
    (PFMA) reports on quarterly spending of
    provinces, Sec 71 (MFMA) reports on quarterly
    spending of municipalities, adjustment budgets
  • Compare quarterly (from monthly) revenue
    collections and spending disbursements hockey
    stick effect
  • Under-spending, over-budgeting, rollovers, fiscal
    dumping or saving?
  • Over-spending, under-budgeting, virements or
    deficit financing?
  • Who has the power to re-allocate between
    departments, provinces or municipalities?

3- Budget process and products
  • With implementation of Money Bills Amendment Act
    of 2009 annual budget process will be
  • budgeting becomes negotiated between Executive
    and Parliament
  • National, provincial and municipal financial
  • Medium term budget landmarks Budget Review and
    Recommendations reports (due July), Review of
    LBER (due Sep 2010) MTBPS (Nov 2010) and Division
    of Revenue / Appropriation Bills (Feb to Mar
  • In-year monitoring quarterly Sec 32 and Sec 71
    reports (Feb, May, Aug, Nov), adjustments budgets

4- Medium-term trends and forecasts - Situational
analysis (1)
  • Nominal versus real annual growth growth path
    stability or volatility
  • Since 2005/06 when economic growth peaked at
    nearly 6 per annum, the trend has been that of
    deceleration, and a decline of just over 1 p.a.
    in 2009/10. Over the next three years, growth is
    anticipated to pick up and reach 3.7 in 2012/13.
  • By contrast, growth of general government
    spending has been accelerating and has averaged
    nearly 10 p.a. in 2008/09 to 2009/10. This is
    projected to decelerate sharply over the next
    three years to just over 1 p.a.
  • While countercyclical during the early recession
    (though not the boom), government spending is now
    inducing large deficits which will have to be
    whittled back over the medium-term.

4- Medium-term trends and forecasts - Situational
analysis (1)
  • The proportion of GDP devoted to state spending
    has increased from 29.4 in 2005/06 to 34.1 in
    2009/10. This is projected to decline slightly
    over the next three years.
  • There has been, and continues to be, a clear
    shift away from national to provincial and
    municipal levels of government.
  • Provinces increase their share of general
    government spending from 34 in 2005/06 to 36.5
    in 2011/12. The relative importance of
    municipalities grows even more markedly from 22
    to 27.4 in 2012/13.

5.1- Medium term trends and forecasts
Provincial governments Funding (1)
  • In 2005/06, 4.5 of provincial revenue was own
    raised. By 2012/13 however, this ratio is
    projected to continue its downward trend to 2.7.
  • Thus, while government is decentralizing its
    spending, revenue is highly and increasingly
    centralized, leading to characterizations of
    provinces as lacking fiscal autonomy.
  • Fiscal autonomy is also being eroded by an
    increasing preference for conditional over
    unconditional grants. Conditional grants made up
    11.8 of provincial funding in 2005/06. By
    2012/13, this is anticipated to rise to 19.9.

5.1- Medium term trends and forecasts
Provincial governments Funding (2)
  • While the Provincial Equitable Share grows by
    less than 1 p.a. over the next three years,
    conditional grants grow by over 4.
  • Provinces generated small surpluses in 2006/07
    and 2007/08, have swung sharply into deficit over
    past two years, but are optimistically projected
    to reverse course over the next three years.

5.2- Medium term trends and forecasts
Provincial governments Spending (1)
  • The largest component of provincial spending is
    education, but its share has declined by 3 over
    the past 4 years to 42. Education budgets have
    grown rapidly over the past two years, but below
    the average for provincial spending.
  • Save for the past two years, health spending has
    been slightly below average. The contribution of
    health has remained roughly constant.
  • Spending on infrastructure was well above average
    during the boom years, but has been well below
    average during the recession, with high levels of
    volatility recorded. Capital spending is
    pro-cyclical and serves as a shock absorber by
  • Administrative services are similarly
    pro-cyclical but due to the large personnel
    component exhibit less volatility.

5.2- Medium term trends and forecasts
Provincial governments Spending (2)
  • Personnel spending was relatively subdued during
    the boom years, leading to a build-up of wage
    demand pressures. Higher than inflation increases
    and the occupation-specific dispensation have led
    to 9-12 real annual increases in the wage bill
    during the recession. Personnel costs are
    projected to rise very moderately over the next
    two years and even decline in the outer year.
  • Actual and budgeted spending on goods and
    services is more volatile, growing when resources
    allow and decelerating or declining when budgets
    are tight.
  • As indicated earlier, capital spending is the
    most unstable and pro-cyclical component of
    provincial government budgets. This is passed on
    by national government through its capital
    conditional grant programmes.

6.1- Medium term trends and forecasts Municipal
governments Funding (1)
  • The aggregate of local government spending is
    dominated by metropolitan and urban
    municipalities and aggregate trends therefore
    strongly reflect urban rather than rural
  • Own raised revenue constitutes 69 of municipal
    funding and whilst this ratio has been declining
    in recent years, the trend is budgeted to reverse
    itself over the medium-term. The share of own
    revenue derived from property rates and service
    charges has been and is projected to continue
    rising (to 16.4 and 37 respectively).
  • The recent disestablishment of the RSC levy has
    been compensated for by, respectively, a
    conditional grant, the LES and now the fuel levy
    sharing arrangement with the metropoles. This
    transition has imposed high volatility on
    municipal budgets, especially through conditional
    grants from both national and provincial

6.1- Medium term trends and forecasts Municipal
governments Funding (2)
  • Municipalities do not report deficits on their
    capital accounts, but external loans are
    recognised as a source of capital funding.
  • Municipalities generate operational surpluses
    averaging 5-6 of funding. During the boom years,
    these surpluses more than covered the value of
    external loans for capital and are projected to
    do so for the next two. However, during the
    recession (2008/09 to 2009/10), the operational
    surpluses have declined below that of loans. This
    implies net deficit financing.
  • The capital accounts make up 21 of municipal
    spending compared to about 7.5 of provincial

6.2- Medium term trends and forecasts Municipal
governments Spending (1)
  • Disaggregated data by function (e.g. water,
    electricity, transport) is only available for one
    year, hence no trends have been analysed yet.
  • Personnel constitutes nearly 25 of municipal
    spend and this has been rising slowly. Budgeted
    wage restraint over the medium-term does not stop
    this trend.
  • Bulk purchases of electricity and water are also
    projected to rise well above the government
    average, reflecting expectations of tariff

6.2- Medium term trends and forecasts Municipal
governments Spending (2)
  • Repairs and maintenance reflect a more
    pro-cyclical pattern, rising and decelerating
    faster than average during the boom and recession
    respectively. However growth has been and is
    projected to above average. This item increases
    its contribution from 5.3 to 6.3 over the seven
    year period of analysis.
  • As with provincial governments, capital spending
    is the most volatile and pro-cyclical. Average
    real annual growth averaged 25 over the past
    three years but is projected to decline by 4.6
    over the next three.
  • The impulses for capital spending volatility are
    derived from all sources of capital revenue, but
    especially inter-governmental grants.

7- Conclusion (1)
  • Government revenue tends to be pro-cyclical and
    at municipal level, may even exaggerate the
    business cycle on local economies. This places
    limits on the capacity of government to act as a
    counter-cyclical force.
  • Governments generally ensure a relatively stable
    growth path for personnel and essential goods and
    services. Basic services such as education and
    health at provincial level and water and
    sanitation at municipal level are more
    consistently funded along stable growth paths.
  • If certain portions of the budget are relatively
    fixed, others must be more flexible shock
    absorbers, exhibiting exaggerated

7- Conclusion (2)
  • At all levels of government, capital spending is
    the first to be cut during recessionary periods
    but also most likely to be rapidly increased
    during the boom golden rule of budgeting.
  • To a lesser degree, this is also true of repairs
    and maintenance, non-essential goods and
    services as well as administrative, training and
    infrastructure services.
  • Whilst this may be an operational necessity,
    cutbacks in infrastructure and training are
    counter-productive to laying the foundations for
    future growth.

8- Way forward? (1)
  • Defining elements of the results chain from
    financial inputs to physical outputs, outcomes
    and developmental impacts requires
    non-financial data to measure efficiency and
  • Analysing linkages between policy objectives, the
    legal framework, institutional and governance
    capacity, service delivery levels and modalities,
    accountability mechanisms and developmental
  • Assist development of capacity of Parliamentary
    Budget Office. What value can we add?
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