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Media Centre  |  Proposals

The People's Budget 2001: Summary

Proposals by COSATU, SACC, SANGOCO, 21 February 2001


The People's Budget 2001: Summary

Introduction

The People's Budget presents an alternative to the current macro-economic framework. Without attempting a detailed alternative to the national budget, it demonstrates the need for basic changes in the orientation of fiscal policy and expenditure. The proposals were developed jointly by the Congress of South African Trade Unions (COSATU), South African Council of Churches and the South African NGO Coalition, with technical support from the National Labour and Economic Development Institute. The People's Budget 2001 should become a living document, supporting broad-based discussion, education and action to ensure the budget process increasingly reflects the needs of the majority of South Africans.

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

The challenge of reconstruction and development

The key problem facing South Africa remains the poverty and inequality left by apartheid. South Africa ranks as the third most unequal society in world, surpassed only by Brazil and Guatemala. Virtually all studies show that since 1994, no real improvement has occurred in this regard. Poverty is worst in the rural areas, particularly in the regions that include the former homeland areas.

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

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

  • A robust effort to redirect government spending toward historically deprived communities,

  • GEAR,

  • An industrial strategy focused primarily on improving competitiveness and especially exports, and

  • A labour policy designed to shift from the oppressive colonial relationships of apartheid to a modern labour market.

GEAR reinforced the vicious cycle of poverty. The tight restrictions it placed on government spending contradicted the need to improve government services for the majority of South Africans. The failure of the GEAR strategy emerged in massive job losses, slow growth and low investment in the past three years – trends documented by the People's Budget.

Toward a developmental budget

A developmental strategy must break the vicious cycle of poverty by addressing poverty through government programmes and an equitable growth strategy. In that context, besides the normal administrative and security functions, the state must fulfil four roles:

  • Driving a growth strategy that focuses on providing strong policy support for sectors to protect and create quality jobs, meet basic needs for the poor, and expand exports;

  • Providing a higher social wage – that is, government services and grants provided to households in addition to earned income;

  • Strengthening democracy; and

  • Supporting alternative centres of economic power - a stronger state sector, co-operatives and small and micro enterprise, based in part in land reform, improved housing, and investment in skills development.

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

The apartheid system left a heavily distorted structure of spending on the social wage, with virtually no support for black households. Between 1994 and 1996, substantial progress was made in improving social services and infrastructure in historically black communities. Thereafter, GEAR led to fresh cuts in the social wage. In 1996-'99, real expenditure on education, health, welfare and infrastructure fell each year, while police and housing remained virtually unchanged. The decline in per person terms was obviously even larger.

The MTBPS for 2000/1 to 2003/4 projected real growth of about 2 per cent overall. But the bulk of the increase will benefit defence, economic services and infrastructure. Education, health, welfare and policing still face reductions in spending per person over the next three years.

The People's Budget proposes that real annual expenditure on infrastructure, welfare, health, the justice system and education increase at least 2 per cent over population growth for the next four years. By 2004, that will restore spending on the social wage, in real per capita terms, to 1996 levels. To accommodate this increase, by 2003/4 the budget as a whole will have to increase by R12 billion over current MTBPS projections.

The People's Budget proposes a basic income grant as a critical component in an effective comprehensive social security system. The basic income grant would provide R100 to R200 a month to every individual, offset against other social grants. Initially, it would be funded primarily through a solidarity levy on the rich. A grant of R100 a month to all South Africans aged over 17 and under 65 would cost around R25 billion a year. If paid to all individuals over six, it would cost about R40 billion a year. As the grant provides the basis for economic growth in the medium term, the relative fiscal burden reduces over time.

The People's Budget further proposes a national health-insurance scheme (NHI). The NHI would integrate private and public health facilities into a single system funded through the budget. It would be funded by the existing budget plus a progressive dedicated levy equal to existing private health costs. The levy would be on high incomes, both salaries and other, and would effectively replace, not increase, the current cost of health insurance and medical schemes.

The People's Budget proposes a substantial increase in spending on treating and preventing HIV/AIDS. Critical treatment strategies include obtaining cheaper medication; treatment for opportunistic diseases and STDs; use of anti-retroviral therapies including, but not restricted to, prevention of mother-to-child-transmission; and establishing a proper infrastructure for counselling. It is also critical that government make condoms available on a broader basis. The current budget for condom provision suffices to provide around five condoms per adult South African a year. Yet many adults cannot afford to buy condoms, and in remote areas they may not be available at all. The cost of anti-retroviral treatment and condoms alone would come to around R7 billion a year – but the savings to society are inestimable.

The People's Budget proposes increased funding for basic education and skills development. Between 1996 and 1999, in real terms spending on education shrank by 3 per cent a year. The 2000 MTBPS projects only 0,8 per cent growth on average in the coming three years – well below the rate of growth in the population.

Four main areas of under-resourcing have emerged in education, especially in historically black rural areas: the virtual absence of auxiliary staff – cleaners, security personnel and clerks; the lack of mathematics, science, culture and art teachers; the weakness of basic school infrastructure; and the near-absence of government under-funding for Early Childhood Development (ECD) and Adult Basic Education and Training (ABET).

To deal with the budget shortfall, the education system has permitted schools to levy fees. This system contributes heavily to inequalities. Schools in richer areas can charge more, letting them hire more staff and improve their equipment. But poor children cannot afford the fees to these schools.

The People's Budget proposes a repositioning of infrastructure spending. The delivery of infrastructure must go beyond meeting minimum basic needs to providing a basis for household economic activity. In particular, housing programmes that perpetuate settlement far from urban centres and employment cause higher transport costs for workers, difficulties in providing government services and municipal infrastructure, and falling building standards. Moreover, the current cuts in budgets have undermined maintenance, which will ultimately impose very heavy costs.

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

A developmental fiscal package

After looking at proposals on expenditure, the People's Budget proposes both ways to increase funding for developmental programmes as well as measures to improve the quality of spending.

The Economic Policy Research Institute EPRI modelled the implications of higher taxes and deficits for the People's Budget. It provided three possible scenarios. All of them increase both taxes and government borrowing. The resources raised are channelled into productive social spending – specifically:

  • Improvements in the social wage, which stimulate domestic demand and increase capital and labour productivity, and

  • A targeted growth strategy that encourages investment and employment creation.

As a result, the initial rise in the deficit relative to GDP is soon reversed, demonstrating the sustainability of a somewhat more relaxed fiscal stance.

The People's Budget further proposes the introduction of multiple VAT rates in order to counter the regressive nature of the VAT. The People's Budget rejects the idea of funding developmental programmes like the Basic Income Grant through an increase in the VAT, which some sectors of private business and opposition parties have proposed.

That would effectively support the very poor only by taxing the poor. Research shows that households earning R1500 a month pay 10 per cent of their income on VAT, compared to 7 per cent for those earning over R10 000 a month. Yet in the past three years, tax cuts have concentrated on personal income tax and corporate taxes. Since only those earning over around R2000 a month pay income tax, these reductions do not benefit the poor.

Although many theorists argue for a single, uniform rate, only 18 countries have actually adopted this approach. Most countries zero-rate basic necessities, and many have higher rates for luxuries.

The People's Budget proposes an extension of zero rating to additional basic necessities beyond those already zero-rated by government, and an increase in VAT on luxury goods. This system would mitigate the regressive burden of VAT without affecting overall government revenues.

A third leg of the developmental fiscal package is to restructure the Government Employee Pension Fund (GEPF). The Presidential Jobs Summit agreed on the importance of reviewing the funding of public servants' employees as a way to release resources to increase social spending. Most public service unions have supported this review.

A modest reduction in the level of funding of the GEPF could release substantial resources. The People's Budget proposes:

  • The employer contribution could be reduced to 12 per cent of salaries. That will save a total of R1,5 billion a year.

  • The funding level could be reduced by 2 per cent, or R3 billion a year, for the next three years, and the funds utilised for once-off investments in infrastructure and housing.

A more substantial reduction in the level of funding, establishing a fully Pay-As-You-Go system, would release even more resources. Finally, the arms procurement programme, currently estimated at R43 billion over the next ten to twenty years, effectively shifts spending from the social wage to defence. Since the contracts are mostly denominated in dollars, if devaluation is more rapid than expected the impact will be even greater.

According to the MTBPS, defence spending rose from 6,7 per cent of total spending in 1999/2000 to 7,5 per cent in 2000/1, and will stabilise at 7,7 per cent for the next three years. Defence will grow by 8,5 per cent a year over the period, compared to 7,6 per cent for expenditure as a whole, and only 6,6 per cent for the main social services and the criminal justice system. The magnitude of the defence spending appears when we look at total expenditure on programmes for “poverty relief and job creation,” which the 2000 Budget

Review gives as around R5 billion between 1999/2000 and 2002/3. An unexpected deterioration in the exchange rate would have even more severe implications for the social wage. Some 85 per cent of the package is denominated in foreign currencies. Given the expected slow real growth in the budget, rapid depreciation would squeeze other functions even more than anticipated.

Contractual obligations make it difficult to reduce spending on arms procurement in the short run. The People's Budget proposes, however, that any further procurement be subject to the strictest possible scrutiny. Government should immediately inform vendors that it will not procure additional armaments under existing contracts. If evidence of corruption surfaces, South Africa should withdraw from the existing contracts.

The People's Budget also explored ways to improve the quality of government spending. Reports on under-spending in government departments have created the impression that they do not have the capacity to spend more resources. In the event, under-spending came to only about 2 per cent of expenditure by national departments in 1999/2000. More recent figures and data on provinces are not available.

Almost 80 per cent of under-spending came from just four departments – Welfare, Health, Trade and Industry and Public Works. In every one of these cases, the programmes that displayed under-spending aimed at providing funds to small businesses or NGOs. In contrast, the big social services had no problem spending their entire budget through their normal delivery systems.

Various factors inhibit the ability of departments to spend their budgets effectively. They include excessive reliance on private partners, systemic weaknesses in conditional grants, lack of appropriate management skills, the procurement system, and the broader effects of fiscal restraint.

A key problem in the spending of many government departments is the question of sustainability. Central weaknesses include the separation of responsibility for capital and current budgets, so that one agency puts in infrastructure but another is responsible for staffing and maintaining it; and unsustainable standards for delivery as a result of budget cuts.

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