MTBPS Hearings

The medium term expenditure framework purports to

"Provide for real growth in expenditure on public services with particular emphasis on social services provided by provincial departments and to enhancing the basic municipal infrastructure and services".


Medium Term Expenditure Framework

To achieve these objectives the following goals are mapped out in the Medium term expenditure framework (MTEF) part of the MTBPS:

Poverty reduction and development, addressing the needs of vulnerable groups through extending social assistance, health and education

The intension to expand the share of expenditure going to social services goes towards achieving these objectives. This is meant to grow from 57.4% this fiscal year to 57.8% of total expenditure in fiscal year 05/06.

Within the social services share of expenditure, the following points are noted:
Expansion of the early childhood development programme, disbursements towards basic adult education and stepped up spending on learner support materials in education.
Increased amounts budgeted for health and growing share of expenditure in the MTEF. An additional R3.3bn has been allocated step up enhanced response to HIV/AIDS over the next 3 years.

In addition to this, social security grants have been increased this year by 15.2% on average in response to the current high inflation especially food inflation. R400m has also been put aside to provide for people affected by food shortages this year. The electrification programme is also receiving an extra R350m per annum as of financial year 2001/02. Conditional grants to provincial government for poverty relief are increased over the next year. There is also an allowance to provide for the improved delivery and reach of the social security grants.


Enhancing investment in municipal infrastructure, rural development, and urban renewal

This goal is catered for in the MTEF by increases in provincial and local government grants for infrastructure development and housing. The housing grant is increased by R373m this year and the provincial infrastructure grant rises to R3.1bn in 2005/06. Labour-based infrastructure development receives an additional R1bn over the next 3 years.

Expanded capacity in safety and security sector

The MTBP statement indicates increases in the integrated justice system portion of budgeted expenditure. This amount is set to grow at 9.4% per annum average over the MTEF. This budget looks to increase SAPS personnel by 5000 per annum over the MTEF. There is also particular focus on the improvement of the efficiency of the judiciary and anti corruption measures in correctional services.

Higher education restructuring

This is provided for in the Education portion of expenditure

Accelerated land reform

The land reform programme will be stepped up considerably during the MTEF period. R323m has been made available this year for this process.

Re-engineering of services to citizens

The Home Affairs National Identification System (HANIS) is to receive increased funding over the MTEF period in order to increase efficiencies at home affairs. Increased allocations of R4.8bn over 3 years are aimed at supporting the delivery of basic services households in local government disbursements.

Increasing support for research and development

The budget framework allows for a steady rise in research and development funding in support of growth and technology advancement

South Africa’s growing responsibilities in Africa and international relations

Provision is made for increased expenditure in international commitments in the medium term, especially after the formation of AU and NEPAD. Provision is made for the establishment of several new missions in African countries.


These are but some of the major points coming out of the MTBPS in relation MTEF and provincial and local government finance.

Implications of the MTBPS

The following is our view of the provisions in the budget

Positive budget providing for poverty relief and pro-growth

This budget provides for increased expenditure over the medium term, with expenditure expected to grow by 4.7%per annum in real terms over the period. The emphasis on poverty relief and social security spending is especially welcome as a step that is solely needed in poverty stricken areas of the country. The emphasis on education, health and improved infrastructure is also positive. Increased spending should also drive economic growth and social advancement.

Belief that more could be done

Though expenditure is increasing and going to all the right places, nominal expenditure growth decreases over the period from 16% between fiscal years 2001/02 to 8.5% between 2003/04 and 2004/05. Non-interest expenditure growth also falls from 6.7% to 4.7% in the period. We still question whether a deficit at 1.6% of GDP is not too low for country with the problems facing South Africa. Our belief is that the country could afford to borrow more, especially in the local bond market where there are large supply pressures, and use this towards the economic upliftment of the people and job creation.

Concerns about how this framework interacts with the inflation targeting monetary policy framework

Though monetary policy is the sphere of the reserve bank, the government sets the inflation targets. The increase in personnel spending this year largely due to 9% wage hike and the expansionary stance taken by fiscal policy creates a question of how effectively fiscal policy supports the desired lower inflation outcome. Inflation forecasts in the MTBP statement have been raised from 6.9% -- 5.8% to
9.2%--7.2%. This indicates that government is gearing itself up for higher inflation than targeted in the medium term and will spend likewise. We believe that there is a danger of this inflation scenario becoming self-fulfilling because spending has been adjusted upwards. We therefore believe that this budget adjustment indicate a marginal shift in government policy towards growth and away from low inflation.

Omissions in the MTBPS

There are a number of issues that the market was looking to get clarity on in the MTBPS that were omitted from the statement. These are detailed below:

Privatisation and Telkom

Market consensus is that the R12bn proceeds originally expected from the Telkom listing at the tabling of the 2002 budget in February are unlikely to be realized if Telkom is listed in February 2003 as indicated. Our telecom sector analyst puts the value of Telkom at R5.5bn – R6.9bn currently. The market expected clarity as to what the expected proceeds from the IPO would be and how national treasury was going to make up for the shortfall in funding. This information was not forthcoming.

Arms Procurement Deal

The market was anticipating an update on costs of the arms procurement deal and expectations thereof. This information was also not forthcoming in the statement.




Inflation Targeting

Market participants were looking for clarity on how inflation targets are set, options available to government on the structuring of the framework and procedure pertaining to the targets. Although the changes in the target were discussed, this discussion was not sufficient to clarify all issues on the matter. The market is therefore still left with uncertainty on what is likely to happen in the future and what the triggers for change are.

Conclusion

Our view is that the MTBP is positive for economic growth over the MTEF but a more expansionary stance could have been adopted without compromising fiscal discipline. There is also the seemingly conflicting stance in relation to inflation targeting and omitted issues that need more clarity.